Category: Administrative & Regulatory

Going Beyond: When Can Courts Look Past the Record in an APA Review?

Regulated companies need to understand what material courts can consider when they review administrative decisions. The Administrative Procedure Act generally allows courts to consider only the existing administrative record when reviewing agency decision-making to determine whether agency decisions are arbitrary and capricious. But the Supreme Court recently reminded us that this rule is not absolute by looking beyond the record in Dep’t of Commerce v. New York to block an agency decision that it found to be based on a “contrived,” pretextual rationale.

Regulated companies may be able to ask courts to consider information beyond the administrative record if they can show that the agency acted in bad faith or exhibited improper behavior. A company’s ability to present the court with information beyond a record carefully constructed by an agency can be a powerful tool.

The following cases illustrate that a movant may not need to conclusively prove that the agency behaved improperly to convince a court to review evidence beyond the administrative record. But the evidence must form a picture that gives the court reason to believe there was bad faith or improper behavior. Here’s a breakdown of several case examples:

Dep’t of Commerce v. New York Goes Beyond the Record

Dep’t of Commerce v. New York presented the Court with a challenge to Secretary of Commerce Ross’s decision to add a citizenship question to the 2020 census. In defense of his decision, the Secretary presented a record showing that the Department of Justice had asked that the question be added so it could more effectively enforce the Voting Rights Act. But extra-record discovery revealed that the DOJ’s request was not the real reason that Secretary Ross had added the question. Rather, extra-record discovery showed that the Secretary had planned to add the question all along and had, in fact, solicited the request for the question from the DOJ. Viewed in that light, the Supreme Court determined that the Voting Rights Act rationale was “contrived” and affirmed the lower court’s decision to bar the Department of Commerce from asking the question.

Writing for the majority of a fractured Court, the Chief Justice acknowledged that while “[i]t is hardly improper for an agency head to come into office with policy preferences and ideas . . . and work with staff attorneys to substantiate the legal basis for a preferred policy,” the Court “cannot ignore the disconnect between the decision made and the explanation given.” The Court noted that to confine itself to the administrative record and ignore the Secretary’s extra-record actions would be “to exhibit a naiveté from which ordinary citizens are free.”

To understand why this decision is important, observers need to take a deep-dive into the Court’s decision. Why could the courts look beyond the administrative record here? Because the district court invoked—maybe prematurely in this case—an exception to the rule against extra-record discovery from Citizens to Preserve Overton Park, Inc. v. Volpe. This exception gives courts discretion to go beyond the existing administrative record if the party challenging the agency action makes “a strong showing of bad faith or improper behavior” underlying the agency decision.

When Do Courts Use Overton Park to Look Beyond the Record?

While every circuit has recognized the Overton Park exception—and most also recognize other, circuit-specific exceptions that allow for a party challenging an agency decision to supplement the record—the overwhelming majority of courts have declined to use Overton Park’s exception to look beyond the administrative record. In his Dep’t of Commerce v. New York dissent, Justice Thomas followed this school of thought. He disagreed that plaintiffs had made a sufficiently “strong showing” of bad faith or improper behavior by Secretary Ross and noted that the Supreme Court “ha[s] never before found Overton Park’s exception satisfied.”

Given the fact that the APA requires courts to defer to agency decision-making, the courts’ reluctance to embrace Overton Park is unsurprising. Nonetheless, some have looked beyond the record.

In Sokaogon Chippewa Cmty. v. Babbitt, for example, the district court allowed the party challenging the agency decision to supplement the record after it made a strong showing of improper behavior behind a decision of the Department of the Interior. There, three Indian tribes had applied to the United States to convert a greyhound racing facility into an off-reservation casino. When the Department denied the application, citing the “strong opposition of the surrounding communities,” the tribes challenged the decision. The tribes argued that the Department’s reason was pretextual and pointed to unexplained procedural delays; suspicious communications between opposition tribes, senators, lobbyists, and White House staff; and a draft report from the Indian Gaming Management Staff, which had recommended that the application be approved.

The court initially limited its review to the record because plaintiffs had not proven improper behavior. But it then reversed course and granted the plaintiffs’ motion for reconsideration, noting that Overton Park’s “strong showing” requirement did not—and, logically, could not—require conclusive evidence of improper behavior. Instead, the court was satisfied that the plaintiff had “suppl[ied] sufficient evidence . . . as to raise suspicions that defy easy explanations.”

Following Babbitt’s lead, the district court in United States v. Sanitary Dist. of Hammond also allowed extra-record discovery, there after the party challenging an EPA decision had made a sufficient showing of bad faith. In that case, an EPA official recused herself from a dispute to avoid the appearance of partiality. But suspicions were later raised when she, without explanation, reinstated herself after receiving poignant, critical questions from her chosen successor’s counsel. The court allowed extra-record discovery to reveal any potential impropriety behind her decisions. The court noted that while it had “not f[ound] that bad faith or improprieties in fact influenced the [decision],” the defendant had made “a ‘strong showing’ that the evidence of record ‘suggests’ that bad faith or improprieties ‘may have influenced the decision maker.’”

Key Takeaways

A court’s decision to go beyond the record—as explained by the lower court in Dep’t of Commerce v. New York—is most often “based on a combination of circumstances that [when] taken together, [are] most exceptional.” Observers may note that the Court’s decision to go beyond the record in Dep’t of Commerce v. New York seems to conflict with last term’s decision in Trump v. Hawaii. But maybe they can be reconciled. There, the state of Hawaii and three U.S. citizens challenged Presidential Proclamation No. 9645—colloquially referred to as the “travel ban”—which placed elevated immigration restrictions on eight countries, six of which were predominantly Muslim. The plaintiffs argued that the President’s extra-record statements showed that the national security justifications behind the ban were, in fact, pretext for the Proclamation’s true animus: religious discrimination. Given the nature of then-Candidate Trump’s public statements, the case seemed to present the Court with the opportunity to consider evidence of pretext that went beyond the record.

But of course Trump v. Hawaii, unlike Dep’t of Commerce v. New York, did not involve any agency decision-making. It instead involved a challenge leveled directly at the Executive itself on a matter squarely within its traditional province: national security. This distinction compelled the Court to defer to the Executive and limited the Court’s consideration of extra-record material. Thus, the Court applied a rational basis review and found that even if the challenging party could demonstrate pretext, the President’s non-religious justifications rationally supported the entry restrictions.

Ultimately, Dep’t of Commerce v. New York reminds us that an administrative record may be permeable under the right circumstances. And although the “substantial showing” bar remains high, perhaps courts will now be more apt to allow extra-record discovery when reviewing agency decision-making. That willingness could enable companies to more effectively challenge agency decisions based on pretextual reasoning—reasoning that would not be reflected in the administrative record.

© 2019 Schiff Hardin LLP
Article by J. Michael Showalter and James Cromley of Schiff Hardin LLP.
For more on the Administrative Procedure Act see the Administrative & Regulatory page on the National Law Review.

Protecting Your Brand and Trademarks in the Cannabis Space Following the 2018 Farm Bill

The 2018 Farm Bill [1] relaxed restrictions covering hemp-based cannabis products, and it is causing a shift in business strategies in the industry. Instead of a full prohibition of trademark registrations covering cannabis goods or services, a narrow range of filings is now permitted, so long as they conform to the requirements of the Farm Bill and the latest USPTO guidelines. While the regulatory framework is still being developed, cannabis-related business owners who could not previously receive federal trademark protection are now reconsidering their trademark strategies.

The principal change from the 2018 Farm Bill is that while all cannabis products derived from marijuana are still prohibited by federal law under the Controlled Substances Act (CSA), those derived from hemp are now permitted, albeit still tightly regulated. Hemp-based cannabis products are defined as those that contain no more than 0.3 percent THC, the primary active ingredient in marijuana. Accordingly, certain products and services derived from hemp are now legal under federal law, and the USPTO has published guidelines that allow narrow federal trademark registrations covering them.

The USPTO had previously refused any trademark application that covered cannabis products or services. In response, many businesses have filed state-law trademark applications in jurisdictions in which marijuana has been legalized, although this provides only limited protection. Businesses have also tried to circumvent the federal prohibition by filing for goods and services tangentially related to marijuana or cannabis, such as apothecary or pharmacy services for medical marijuana, or services for the provision of information and/or advocacy for cannabis and its uses. The policy at the federal level is still to refuse these applications that cover goods and services that are legal on their face but are in fact related to marijuana. But that policy is now moot for certain hemp-related applications that conform to the new guidelines.

Even for applicants that have succeeded in registering trademarks for cannabis-based products under facially legal goods and services descriptions, attempts to enforce these marks can be hollow. During the course of litigation, it may become clear that the activities of the trademark owner are not permitted under federal law. These registrations are still valuable to block other filers as well as to signal that a business is adopting and is willing to enforce a particular mark, but the new USPTO regulations can provide substantially more protection to businesses that sell qualifying hemp-related products or services.

Under the new USPTO guidelines, marks covering hemp-based cannabis products and services are permitted to be registered as long as they contain no more than 0.3 percent THC and are otherwise legal under federal law. Accordingly, there are certain exceptions and requirements, which include the following:

  • The 2018 Farm Bill left jurisdictional responsibility for regulating certain products to the FDA. As of now, the FDA does not permit cannabidiol (CBD) to be sold in food or drug products. Accordingly, registrations for marks that cover “foods, beverages, dietary supplements, or pet treats containing CBD” are still prohibited. This restriction applies only to CBD at this point. Other non-CBD hemp-based food or drug products would be permitted registration so long as they conform to the applicable FDA guidelines. Also, CBD products that are not a food or drug may still be permitted registration as long as they do not fall under the FDA’s jurisdiction or are not otherwise prohibited by other federal laws.  See USPTO Examination Guide 1-19.
  • For marks covering cultivation and other services related to hemp-based products, applications will be examined not only for compliance with applicable USPTO requirements but also for compliance with the 2018 Farm Bill and applicable state laws. Applicants must show that they have an applicable state license to provide their services, as not all states follow the 2018 Farm Bill’s guidance for hemp products, and in many states, these products are still illegal for commercial purposes or highly restricted.[2]

The new guidelines also allow for applicants to amend pending applications covering cannabis products to conform to the new requirements. To do so, the applicant must limit the list of goods and services to products that contain no more than 0.3 percent THC and submit any required documents showing that the goods and services covered are legal. The application’s filing date would also be amended to coincide with the legalization of hemp-based products, and the USPTO would conduct a new search of the register for prior marks to account for the later filing date.

Under the new regulations, cannabis businesses should consult a trademark attorney to consider their options to protect their trademarks on a federal level. Although the law is in flux and uncertainty abounds, there are several points from a trademark-filing strategy perspective to keep in mind when considering filings under the new guidelines:

  • The new, narrow USPTO guidelines will not be helpful to every business operating in the cannabis space. Businesses that will be helped either already offer or are considering offering hemp-derived goods and services that contain less than 0.3 percent THC, goods that do not constitute food or drug products that contain CBD, and goods that are not otherwise in conflict with FDA or other federal laws or guidelines.
  • A large number of trademark applications will likely be filed for hemp-based products soon, regardless of their applicants’ qualifications. Businesses should explore their options and file quickly, and keep in mind that it will be difficult to show prior use to oppose a third-party filer, as any such use was likely illegal under federal law.
  • Because the USPTO can suspend applications for good cause, it is logical to expect the USPTO to grant suspensions of applications while applicants are in the process of obtaining a license to cultivate hemp-based products.
  • Creating even more uncertainty, the 2018 Farm Bill has directed the U.S. Department of Agriculture (USDA) to derive regulations for hemp-related activities that fall outside of the FDA’s jurisdiction. The USPTO is expected to quickly adopt new guidelines to conform to the USDA.
  • Narrowing an existing application to conform to the new requirements will significantly narrow the filing. After such an amendment, the application cannot be amended back to cover the previous broader range of goods and/or services. If an applicant anticipates a change in law and can draw out the application process to wait for such a change, it may be advisable to file a new application that conforms to the new guidelines rather than amending the old one. The applicant can then keep the broader application alive to preserve their options.
  • In some cases, existing registrations may have made it through the examination process, even if they cover goods and services that were prohibited under federal law at the time of filing. If this is a possibility, businesses should consider their options for re-filing based on the new guidelines which on their face do not apply to amending existing registrations.

The new marijuana legalization framework being put in place state by state, most recently in Illinois, has raised more questions than answers in the state-regulatory sphere. However, until now, the federal guidelines were clear, as all cannabis-related products were prohibited under federal law. After the passage of the 2018 Farm Bill, this is no longer the case. As the law in the cannabis sphere unfolds, businesses should work closely with a trademark attorney to explore options for protecting their valuable brands.

© 2019 Dinsmore & Shohl LLP. All rights reserved.
More on Cannabis & Marijuana law developments on the National Law Review Biotech, Food & Drug law page.

Asbestos Receiving Renewed Attention in Light of Additional US EPA Assessments under TSCA and Potential Ban by Congress

Asbestos is in the hot seat these days and is receiving significant attention from both US EPA and Congress.  In particular, US EPA continues to evaluate asbestos risks under the Toxic Substances Control Act (TSCA) and has imposed additional regulations, while Congress is currently considering an outright ban on the substance.

On April 25, 2019, US EPA issued a final Significant New Use Rule (SNUR) under Section 5 of TSCA to prevent certain discontinued uses of asbestos from re-entering the marketplace without a review by EPA.  The rule essentially restricts manufacturing, importing or processing of asbestos for certain target uses that are neither ongoing, nor already prohibited under TSCA.

The SNUR covers a number of target uses for which US EPA “has found no information” indicating that they are ongoing: adhesives, sealants, and roof and non-roof coatings; arc chutes; beater-add gaskets; cement products; extruded sealant tape and other tape; filler for acetylene cylinders; certain friction materials; high-grade electrical paper; millboard; missile liner; packings; pipeline wrap; reinforced plastics; roofing felt; separators in fuel cells and batteries; vinyl-asbestos floor tile; woven products; any other building material; and “any other use of asbestos that is neither ongoing nor already prohibited under TSCA.”  While the SNUR does not actually prohibit these uses, none of the uses may return to the marketplace without EPA review of their potential risks to health and the environment.   A party must submit a “significant new use notice” to US EPA at least 90 days prior to commencing manufacturing, importing or processing of asbestos for such uses.

While the Rule effectively expands the number of restricted uses, the SNUR has raised concerns as it essentially removes the uses from US EPA’s pending TSCA risk evaluation of asbestos, which is being performed pursuant to EPA’s December 2016 listing of substances under Section 6(b) of TSCA for which a final risk assessment is due in December 2019.

Meanwhile, Congress is considering a ban on all uses of asbestos (which is already banned in more than 60 countries).  Most recently on May 8, 2019, the House Energy and Commerce Committee’s environmental panel held a hearing on H.R. 1603 (the “Alan Reinstein Ban Asbestos Now Act of 2019” introduced on March 7, 2019).  The Bill seeks to amend TSCA to require US EPA to ban importation and use of asbestos in the US within one year of enactment, broaden EPA’s definition of asbestos to include additional fiber types, and also require that EPA and the Departments of Health and Human Services and Labor assess and report to Congress regarding existing “legacy” asbestos in residential, commercial, industrial, public, and school buildings to determine quantity and risk.

Although there is reportedly openness to a bipartisan compromise on the Democratic-sponsored bill, concerns have been raised as to its application, including the effect upon the chlorine industry and that it may hamper the industry’s ability to manufacture chlorine for public water supply use and healthcare facility sanitization.  For instance, on May 8, 2019, the American Water Works Association submitted comments to the Committee noting that “more than forty percent of the chlorine supply in the United States is dependent on production methods that rely on asbestos.” Further, the relatively short 12-month transition period has been cited as another concern, as well as the associated costs.

While US EPA’s TSCA risk evaluation remains ongoing through the end of 2019 (and possibly beyond) and Congress considers the ban proposed in H.R. 1603 in committee and markup, asbestos will continue to received increased attention.  Industries that deal with asbestos-containing materials would be advised to consult with technical and legal experts to consider the implications of these measures, as well as look for additional opportunities to advocate its position to decision makers as these measures are considered and finalized.

 

© Copyright 2019 Squire Patton Boggs (US) LLP
Read more on Environmental & EPA issues on the National Law Review Environmental, Energy & Resources page.

Federal Alcohol Regulator follows FDA, No CBD in Beer, Wine and Liquor

While hemp is now legal under state and federal law, the Alcohol and Tobacco Tax and Trade Bureau (TTB) has made clear that cannabidiol (CBD), a product derived from hemp, is not a permitted ingredient in alcohol beverages quite yet.

The use of hemp and CBD in various products has proliferated in recent months, and the public and stakeholders have looked to the Food and Drug Administration’s (FDA) and TTB for guidance.

On April 26, 2019, the TTB issued an industry circular1, making clear the TTB will look to the FDA for determinations on whether hemp ingredients such as CBD may be included in food or alcohol. The FDA recently has reiterated that CBD is not a permitted ingredient in food or dietary supplements under federal law. The FDA is, however, beginning the process of reevaluating this position which could lead to an administrative rulemaking.

Following the approach of the FDA, the TTB has stated it will not approve alcohol beverage formulas including certain hemp ingredients, including CBD. However, hemp seeds and hemp seed oil are approved ingredients as they comply with FDA regulations.

There are a couple key points to consider following the statement by the TTB:

  • All alcohol beverages sold in the United States require formula approval by the TTB, even if the alcohol is sold exclusively within a single state. In comparison, the FDA regulates interstate commerce, therefore, food, beverages and dietary supplements produced and marketed exclusively in a single state may be beyond the scope of FDA regulation (but may subject to state-specific regulations).
  • Certain alcohol beverages may still be legally marketed as containing hemp. However, those products may only contain hemp seeds or hemp seed oil. Both the TTB and the FDA have approved hemp seeds and hemp seed oil as permitted food additives or ingredients. The TTB also left open the possibility of approving other parts of the hemp plant that don’t include CBD or THC.
  • The FDA is holding a public hearing on May 31, 2019, where it is seeking data and information regarding the safety of products containing CBD. The TTB appears likely to follow the lead of whatever decision is ultimately reached by the FDA. The TTB stated it will be issuing more detailed guidance regarding CBD and hemp as well.
  • The TTB further reiterated it will not approve formulas containing marijuana, or other controlled substances.

The 2018 Farm Bill made hemp a legitimate commercial crop and removed hemp from the Controlled Substances Act. Similar legislation in Wisconsin also legalized hemp at the state level. However, hemp and its derivatives, including CBD, remain regulated products. The FDA regulates hemp and CBD as ingredients in food, dietary supplements and cosmetics. The TTB regulates alcohol beverage formulas and ingredients.

 

Copyright © 2019 Godfrey & Kahn S.C.
This post was written by Zachary Bemis of Godfrey & Kahn S.C.
Read more on TTB & FDA Hemp Regulation on the National Law Review Biotech, Food, Drug page.

Implementation of “Buy American” for Infrastructure Projects Begins May 1st

In 2017, President Trump issued an executive order entitled “Buy American and Hire American” which stated a commitment to do just that. Earlier this year, expanding on this policy, President Trump issued an executive order entitled “Strengthening Buy-American Preferences for Infrastructure Projects.” This order requires federal agencies to encourage contractors working on infrastructure projects that receive federal grants or loans to purchase domestically produced materials. Pursuant to the order, agencies are required to begin encouraging use of domestic products by May 1st, and requires submission of an implementation plan by May 31st.

The new executive order seeks to fill somewhat of a gap in current federal legislation that will no doubt have an effect on an investor’s analysis of a public-private partnership delivery model. The federal Buy American Act applies domestic preference to manufactured materials that are used in the construction of federal projects. Then, there are a set of federal laws that have domestic preference provisions for specific materials in specific construction projects that receive federal funding. The new executive order applies to “covered programs,” which basically includes infrastructure projects that received financial assistance from a federal program, but do not currently include domestic preference requirements. In other words, the policy now potentially applies to any project that receives federal funds, even if it is not solicited by the federal government.

The term “infrastructure projects” is broadly defined, and will apply to local projects that receive federal assistance like aviation, surface transportation, ports, water resources, and energy production projects. The new executive order expands both the types of materials and types of projects for which the Buy American policy is applicable. The interplay with rules for local preference enforced by local governments is unclear, although existing federal regulations typically prohibit the use of local preference for federally funded projects. Also unclear is whether there is or will be an actual enforcement mechanism. The significance and magnitude of this latest push for stronger domestic preference will be revealed in the coming weeks as federal agencies begin to encourage the policy and submit plans for implementation.

© 2019 Bilzin Sumberg Baena Price & Axelrod LLP. All Rights Reserved.

This post was written by Elise Holtzman and Albert E. Dotson, Jr.

Read more about US policy updates on the National Law Review’s administrative & regulatory page.

Medical Products & FDA: What to Watch for in 2019

Major legislation impacting FDA often accompanies user fee reauthorizations every 5 years. However, Congress has acted to address public health issues between user fee cycles. FDA regulates 20¢ of every U.S. consumer dollar spent on products ranging from heart valves to insulin to breakfast cereal, so there’s always something Congress can do in the realm of FDA’s statutory authorities. Many FDA-related bills are often bipartisan, too, which suggests action despite different parties in power in the House and Senate. Here are a few key medical product issues we’ll be tracking in 2019.

Laboratory Developed Tests (LDTs)

An LDT is a type of in vitro diagnostic test that is designed, manufactured, and used within a single laboratory. In recent years, FDA has attempted to more actively regulate LDTs, claiming they are more complex now than when the agency was granted authority to regulate devices in the 1970s (FDA had, until recently, generally ignored LDTs using a policy known as enforcement discretion). A few years ago, the agency published a proposed approach that caused a stir in Congress and the lab industry and after years of debate Congress seems ready to act on LDTs, which some are now calling In Vitro Clinical Tests (IVCTs). However, New Jersey Democrat Frank Pallone, the likely incoming chairman of the House Energy & Commerce Committee has expressed concern with FDA’s proposed approach to IVCT regulation, especially its heavy reliance on review by accredited persons (i.e., third party review) and pre-certification. FDA’s position was outlined by Commissioner Scott Gottlieb, who in a September 2018 speech stated that FDA envisions reviewing only 10% of IVCTs, 40% would use the pre-certification model, and the remainder would not be subject to FDA premarket review.

Who blinks first? Based on my experience at FDA, the agency is likely to wait for Congress to make the first move largely because FDA went all in by submitting 59 pages of “technical assistance”—essentially a draft bill—to Congress in August 2018. A Democrat-controlled E&C may push for more oversight or a phased-in approach, which is something FDA has resisted. Sure to further complicate discussions is the role of user fees in funding an IVCT regulatory program. Among the questions that need to be answered: how much IVCT oversight will FDA have relative to third parties, how much will that cost, and who’s paying the bill? As a former user fee negotiator for FDA, I can tell you those conversations are not going to be easy.

Digital Health

FDA’s exploration of a new regulatory paradigm for digital health products hit a bump in the road on October 10 when Senators Warren, Murray, and Smith (all Democrats) sent a letter to FDA asking, among other things, what the legal basis is for the digital health pre-cert program. Because FDA does not have the staff capacity or expertise to review all digital health products (including software), part of its solution is to rely on certifications that a product developer has a culture of quality and organizational excellence. FDA also says the current review paradigm is not well-suited to software and similar products that have fast, iterative development cycles. This idea has merit but the details need to be hammered out—likely in statute. And while 2019 is too early to expect legislation, the October 10 letter foreshadows intense scrutiny from HELP Committee Democrats. The agency is still collecting comments on its proposed framework.

Medical Device Cybersecurity

FDA recently made a splash with its cybersecurity playbook and a recently updated premarket cybersecurity guidance. However, while I was at FDA we responded to a lot of requests for technical assistance from both sides of the aisle on legislative language that would: mandate convening stakeholders to recommend guidelines for improving cybersecurity of devices, mandate software bills of materials, or provide basic cybersecurity operational standards for Internet-connected devices, among other ideas. The jury is out on how much any of these ideas would meaningfully improve the nation’s cybersecurity infrastructure at least as it pertains to medical devices. Considering cybersecurity is a hot topic in other contexts (e.g., election security, personal computing), the 116th Congress will likely continue to look for legislative wins in this space and we’ll be watching closely to see what the impacts could be on medical products.

Device Servicing

FDA continues to look for a solution to problematic device servicing and will be holding another public meeting in December 2018. While we’re optimistic FDA will come out of that meeting with a draft policy (the agency said it plans to issue a draft guidance document before October 2019), we see challenges with some of the ideas mentioned in a discussion paper the agency released in October 2018. Even as FDA reviews public comments and publishes guidance, there could be a role for Congress, such as to ensure appropriate oversight of servicing through mandated inspections. We’re looking forward to seeing how interaction between OEMs, servicers, and FDA at the December workshop could influence the draft guidance.

OTC Monograph Reform

As noted in our Lame Duck Preview for health issues, OTC monograph reform legislation passed the House but awaits action in the Senate, where it’s stuck in committee. An OTC monograph is like a recipe for an over-the-counter drug that, once approved by FDA, can be used by any drug manufacturer without FDA pre-approval of the manufacturer’s specific drug. The bill would speed up the regulatory process for OTC monographs by allowing use of administrative orders rather than rulemaking. Both bills authorize FDA to grant exclusivity for the monograph developer, which would protect market access, though the amount of exclusivity differs (18 months in the House bill; 24 months in the Senate bill). Likely incoming House E&C Chairman Pallone is—again—who we’re looking to regarding action on this. Despite voting for the House version, it is well-known that Rep. Pallone has concerns about the exclusivity provision. The OTC monograph process has not changed since 1972 and reform efforts have been brewing for a while; if this does not move in the lame duck, this could be in play in 2019.

Opioids

Congress passed major opioids legislation in September 2018 so while Congress may shift its focus to other issues, we’ll be keeping an eye on how the administration is implementing its mandates. FDA in particular has as full plate with:

  • Holding a public meeting to address challenges of developing non-addictive medical products for acute or chronic pain;
  • Issuing new or updating existing guidance documents addressing, among other topics, how FDA considers pain, pain control, or pain management in assessing whether a disease or condition is serious or life-threatening and how FDA may require postmarket studies to assess reductions in effectiveness of a drug that change the drug’s benefit-risk profile;
  • Issuing prescribing guidelines for the indication-specific treatment of acute pain;
  • Developing a list of controlled substances to refer to Customs and Border Protection and other import controls; and
  • Implementing new authority to require unit dose packaging (aka blister packs).

This list is not exhaustive, yet it’s clear FDA will be busy. We’ll be keeping a close eye on administration and congressional actions related to these and other important public health issues in 2019.

©1994-2018 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

ARTICLE BY

Aaron L. Josephson

CFIUS Broadens Coverage of Cross-Border Biotech Transactions

Summary

The Committee on Foreign Investment in the United States recently broadened its coverage of biotechnology transactions via new regulations that became effective on November 10, 2018. This article provides perspectives about how broadly these new rules will affect the biotech industry. All parties to cross-border transactions involving US biotech businesses, whether mere licensing arrangements or full M&A, should carefully consider all US regulatory implications, including application of the new CFIUS rules, US export controls and related requirements. Parties to pending biotech transactions or contemplating future biotech transactions are well advised to take actions.

In Depth

INTRODUCTION

Recent statutory and regulatory enactments have broadened the scope and jurisdiction of the Committee on Foreign Investment in the United States (CFIUS), including its jurisdiction over transactions in the biotechnology industry. This article provides perspectives about how broadly the new CFIUS regulations, which became effective November 10, 2018, will affect cross-border biotech transactions.

The development and growth of the biotechnology industry has spurred a growing volume of cross-border transactions with US life sciences businesses in recent years, involving early stage research companies as well as large pharmaceutical conglomerates. Foreign parties to cross-border biotech transactions have been active and diverse, involving financial and strategic investors and collaborators from Asia, Europe and other regions. Such transactions take a variety of forms, and can be grouped primarily in the following categories:

  • Controlling investments by foreign entities, such as acquisitions of a majority or more of equity or assets of US biotech companies;
  • Joint ventures between US and foreign entities to which US biotech companies contribute assets and/or intellectual property;
  • Non-controlling investments by foreign entities in US biotech companies with or without outbound licenses and/or options to acquire future equity interests or assets; and
  • Straightforward technology licenses granted by US biotech companies to foreign entities without corresponding equity interests issued in US companies.

How many of the foregoing types of transactions are now subject to the broadened jurisdiction of CFIUS? This On the Subject addresses the effect of recent CFIUS regulations on different types of cross-border biotech transactions.

FIRRMA AND BROADENED JURISDICTION OF CFIUS

CFIUS is a federal interagency committee chaired by the US Treasury Department (Treasury) that is charged with reviewing and addressing any adverse implications for US national security posed by foreign investments in US businesses. For background on the fundamentals of the CFIUS process and recent developments, see here, here and here.

As biotechnology entities generally focus on researching and finding therapeutics and diagnostics for diseases and saving patients’ lives, this industry has spurred very little concern for US national security outside of limited areas of bioterrorism and toxins. CFIUS review procedures were largely irrelevant for parties to cross-border biotech transactions. Under the voluntary CFIUS notification rules, parties to very few biotech transactions involving foreign acquirers notified CFIUS and sought CFIUS’s review and clearance of their deals. This may significantly change with the recent enactment of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) in August 2018.

Prior to the enactment of FIRRMA, CFIUS was authorized to review the national security implications of only transactions that could result in control of a US business by a foreign person. FIRRMA expanded the scope of transactions subject to CFIUS’s review to include certain foreign investments in US businesses even in cases where the investment does not result in a controlling interest and imposedmandatory reporting requirements for certain transactions.

On October 10, 2018, Treasury issued new interim rules to implement FIRRMA, establishing a temporary “Pilot Program” that includes a mandatory declaration process. The Pilot Program went into effect on November 10, 2018, and will end no later than March 5, 2020. The interim rules specify 27 industries for focused attention under the Pilot Program, including Nanotechnology (NAICS Code: 541713) and Biotechnology (NAICS Code: 541714), as follows:

Research and Development in Nanotechnology
NAICS Code: 541713

“This U.S. industry comprises establishments primarily engaged in conducting nanotechnology research and experimental development. Nanotechnology research and experimental development involves the study of matter at the nanoscale (i.e., a scale of about 1 to 100 nanometers). This research and development in nanotechnology may result in development of new nanotechnology processes or in prototypes of new or altered materials and/or products that may be reproduced, utilized, or implemented by various industries.”

Such establishments include “Nanobiotechnologies research and experimental development laboratories.”

Research and Development in Biotechnology (except Nanobiotechnology)
NAICS Code: 541714

“This US industry comprises establishments primarily engaged in conducting biotechnology (except nanobiotechnology) research and experimental development. Biotechnology (except nanobiotechnology) research and experimental development involves the study of the use of microorganisms and cellular and biomolecular processes to develop or alter living or non-living materials. This research and development in biotechnology (except nanobiotechnology) may result in development of new biotechnology (except nanobiotechnology) processes or in prototypes of new or genetically-altered products that may be reproduced, utilized, or implemented by various industries.”

The new Pilot Program rules could directly affect parties to multiple cross-border biotech industry transactions, whether they are potential target companies, investors or acquirers. Mandatory, not voluntary, filings with CFIUS will be required for controlling and non-controlling investments that fall within the definition of “Pilot Program Covered Transactions,” and violations of the new rules could result in substantial penalties.

EFFECT ON CROSS-BORDER TRANSACTIONS IN BIOTECH SECTOR

PILOT PROGRAM COVERED TRANSACTIONS

The Pilot Program requires that parties to a “pilot program covered transaction” notify CFIUS of the transaction by either submitting an abbreviated declaration or filing a full written notice.

A “pilot program covered transaction” means either of the following:

1. Any non-controlling investment, direct or indirect, by a foreign person in an unaffiliated “pilot program US business” that affords the foreign person the following (a “pilot program covered investment”):

  • Access to any material nonpublic technical information in the possession of the target US business;
  • Membership or observer rights on the board of directors or equivalent governing body of the US business, or the right to nominate an individual to a position on the board of directors or equivalent governing body of the US business; or
  • Any involvement, other than through voting of shares, in substantive decision-making of the US business regarding the use, development, acquisition or release of critical technology.

As it relates to the biotech sector, the term “pilot program US business” means any US business that produces, designs, tests, manufactures, fabricates or develops one or more “critical technologies” either used in connection with, or designed specifically for use in, the biotechnology industry and/or nanobiotechnology industry. The determining factor is “critical technologies.”

An “unaffiliated” pilot program US business is defined as a “pilot program US business” in which the foreign investor does not directly hold more than 50 percent of outstanding voting interest or have the right to appoint more than half of the members of the board or equivalent governing body.

2. Any transaction by or with any foreign person that could result in foreign control of a “pilot program US business,” including such a transaction carried out through a joint venture.

By contrast, an investment by a foreign person in a US biotech company that does not produce, design, test, manufacture, fabricate or develop one or more “critical technologies” is not a “pilot program covered transaction.”

As it relates to the biotech industry, the term “critical technologies” under the Pilot Program may include:

  • Civilian/military dual-use technologies subject to Export Administration Regulations (EAR) that are relating to national security, chemical and biological weapons proliferation, nuclear nonproliferation or missile technology, excluding, for instance, “EAR99” items (i.e., those not covered by a specific Export Classification Control Number in the EAR);
  • Select agents and toxins; and
  • “Emerging and foundational technologies” controlled pursuant to section 1758 of the Export Control Reform Act of 2018 (the definition of which is forthcoming from the Department of Commerce).

Because most biotech products and technologies are classified as EAR 99 or are not otherwise subject to existing US export license requirements, a US biotech company (not involved with select agents and toxins) would fall under the “pilot program US business” category when one or more technologies such US biotech company produces, designs, tests, manufactures, fabricates or develops are covered in the to-be-released definition of “emerging and foundational technologies,” which are sensitive and innovation technologies not currently subject to export controls but deemed important for US economic security and technological leadership.  Industry observers predict that such definition will likely encompass certain biopharmaceuticals, biomaterials, advanced medical devices, and new vaccines and drugs, because some of these have been the subject of recent economic espionage efforts from groups in select countries such as China and Russia.

The US Commerce Department’s Bureau of Industry and Security (BIS) is expected soon to announce an advance notice of proposed rulemaking, inviting public comments on the development of the scope of such “emerging and foundational technologies.” Interested members of the US biotech industry should monitor and/or participate in this rulemaking procedure, which will define the scope of these new controls. Until new rules defining “emerging and foundational technologies” are issued, many in the biotech industry are expected to take a conservative approach in treating a broad range of biotechnology as potentially within the scope of “emerging and foundational technologies” for CFIUS purposes.

PRACTICAL IMPLICATIONS FOR DIFFERENT TYPES OF TRANSACTIONS

Controlling Investments by Foreign Persons

As discussed above, the Pilot Program applies to “any transaction by and with any foreign person that could result in foreign control of any pilot program US business, including such a transaction carried out through a joint venture.” Thus, parties to a controlling investment by a foreign entity in a US biotech company which is a “pilot program US business” are required to submit a declaration to CFIUS.

It is important to note that the CFIUS regulations define “US business,” “control” and “foreign person” very broadly. Such broad definitions could subject even transactions between two non-US entities to the jurisdiction of CFIUS, at least to the extent their venture involves any US business.

CFIUS regulations define a “US business” to include any entity engaged in interstate commerce in the United States, regardless of who owns it or where it is formed or headquartered. This broad definition authorizes CFIUS to review investments by a foreign business (e.g., a Chinese company) in another foreign business (e.g., a German target company) to the extent the deal involves elements of the foreign target company which is engaged in US interstate commerce, such as a US subsidiary or sales office. In other words, an investment or M&A transaction between two non-US biotech companies could be subject to CFIUS review if there are US business activities that will be controlled by the foreign company post-closing.

The CFIUS rules define “control” to mean the power to determine, direct, take, reach or cause decisions regarding important matters of a US business through the ownership of a majority or a “dominant minority” of the voting shares, board representation, proxy voting or contractual arrangements.

Under the CFIUS regulations, the term “foreign person” includes any entity over which a foreign national, foreign government or foreign entity exercises, or has the power to exercise control, (including a foreign-owned US subsidiary or investment fund). In contrast to a US citizen, a US permanent resident visa holder (i.e., green card holder) is a foreign national under the CFIUS regulations. Hence, a company formed as a Delaware corporation or Delaware limited liability company, which is controlled by green card holders, is also a foreign person for CFIUS purposes. An investment by such a Delaware company into a US biotech company will need to be analyzed under the new CFIUS regulations.

The Pilot Program applies to investments by any foreign investor, regardless of the investor’s country, and there are currently no exemptions. FIRRMA provides that CFIUS “may consider” whether a covered transaction involves a country of “special concern” for US national security, and practitioners generally expect CFIUS will consider the countries of foreign investors and will place heightened scrutiny on select countries, particularly if there is government involvement. However, the new regulations themselves do not establish different treatment for different countries, e.g., China, Canada, France or Germany.

Non-Controlling Direct Investments by Foreign Strategic Investors or Foreign Investment Funds

A large number of recent biotech deals take the form of a non-controlling investment, for example, a 5 – 15 percent investment, directly by a foreign strategic investor (e.g., foreign pharmaceutical companies) or by a foreign venture capital or private equity fund in a US biotech business. In some cases, the investment is coupled with, or conditioned upon, a grant by the US biotech business to such foreign strategic investor or its affiliate of an exclusive license of the former’s intellectual property for a particular geographic territory. A typical provision in such investment transactions entitles the investor to serve as, or nominate, a director or observer on the board. Assuming other features of the deal satisfy the new CFIUS regulations, this common transaction term would now trigger a mandatory CFIUS declaration filing whenever such rights are granted to a foreign investor.

Even non-controlling investments with no rights to a board seat or board observer status could be a “pilot program covered investment” subject to the mandatory filing requirement if the investment involves access for the foreign investors to material non-public technological data and scientific findings.  The term “material nonpublic technical information” means “information that is not available in the public domain, and is necessary to design, fabricate, develop, test, produce, or manufacture critical technologies, including process, techniques, or methods,” and does not include “financial information regarding the performance of an entity.” Access to such information is common for biotech investors, precisely because of the need for parties to any biotech deal to focus on the business’s underlying science. For both controlling and non-controlling investments, the ability to undertake careful diligence inquiries into underlying key technologies and scientific findings of biotechnology company targets is critical, especially with respect to the targets that are pre-revenue businesses. When such data and information are not yet patented or published in patent applications or other published scientific literatures, the access by a foreign investor to them in a non-controlling investment would make the transaction fall within the definition of a “pilot program covered investment.”

The CFIUS regulations define the term “investment” to mean the acquisition of equity interests, including not only voting securities, but also contingent equity interests, which are financial instruments or rights that currently do not entitle their holders to voting rights, but are convertible into equity interests with voting rights. For example, if a foreign investor is granted a warrant, option or right of first refusal to obtain additional equity interest in a “pilot program US business,” future exercise of the warrant, option or the right of first refusal should be analyzed to assess whether a declaration must be filed with CFIUS and whether CFIUS might find any US national security implications.

Indirect Investments by Foreign Persons via US Investment Funds

The Pilot Program rules establish an exemption from the mandatory declaration requirement for certain passive investments in US businesses made through investment funds. If a foreign investor makes an investment indirectly through a US-managed investment fund in a “pilot program US business,” such an indirect investment will not constitute a covered transaction under the Pilot Program and will not be subject to CFIUS review, even if it affords the foreign person membership as a limited partner or a seat on an advisory board or investment committee of the fund, provided that the following conditions are satisfied:

  • The fund is managed exclusively by a general partner, managing partner or equivalent who is not the foreign person;
  • The advisory board or investment committee does not have the ability to approve, disapprove or otherwise control (i) investment decisions or (ii) decisions by the general partner (or equivalent) related to entities in which the fund is invested;
  • The foreign person does not otherwise have the ability to control the fund, including authority to (i) approve or control investment decisions; (ii) unilaterally approve or control decisions by the general partner (or equivalent) related to entities in which the fund is invested; or (iii) unilaterally dismiss, select or determine the compensation of the general partner (or equivalent); and
  • The foreign person does not have access to material nonpublic technical information as a result of participation on the advisory board or investment committee.

Private equity funds that have foreign investors, especially foreign sovereign funds, as their limited partners, should carefully review their existing contractual arrangements with their foreign investors, as well as the ownership and control of general partners of such funds, to determine whether this “safe harbor” exemption applies to them.

Follow-On Investments

For any transaction that is not subject to the Pilot Program because it was completed before the effective date of the new rules (November 10, 2018), it is important to note that future investments by the same foreign investor may trigger the Pilot Program’s mandatory declaration requirement and should be reviewed for CFIUS implications earlier than 45 days in advance of such new investment.

CFIUS’s prior approval of a “pilot program covered investment” does not automatically endorse any subsequent “pilot program covered investment” by the same foreign person in the same US business. For example, if a foreign person acquired a 4 percent, non-controlling interest in a US biotech company that is a “pilot program US business” which was cleared by CFIUS, and then subsequently acquires an additional 6 percent non-controlling interest in the same US biotech company and obtains access to material nonpublic technical information, the parties to such follow-on investment would be required to file with CFIUS again.

Outbound License of US Technologies

Under new CFIUS regulations, outbound licensing of only intellectual property or technology by a US business to a foreign person does not fall within CFIUS’s jurisdiction, unless it also involves the acquisition of, or investments in, a US business or unless such license is a disguised acquisition of a US business or all or substantially all of its assets. Note, however, that if such technology is controlled under the EAR, access to such technology by a foreign person may require a US export license under the EAR.

Any contribution by a US critical technology company of both intellectual property and associated support to a foreign person through any type of arrangement (e.g., outbound licensing agreements) are now regulated under enhanced US export controls. Under US export control regulations, an export license is required to be obtained before a “controlled technology” classified in certain export classifications under the EAR is transferred or released to a foreign person. US businesses must carefully determine the export classification of any technology before transferring or releasing (e.g., pursuant to a licensing agreement) such technology to any foreign person.

THE NEW MANDATORY DECLARATION PROCEDURE

Parties to a “pilot program covered transaction” (i.e., the foreign investor and the US business) must submit to CFIUS an abbreviated declaration or, if preferred, file a full written notice (as provided under previous CFIUS rules and procedures). The filing must be made at least 45 days prior to the expected completion date of the transaction, so that CFIUS has an opportunity to review the transaction. The penalty for failing to file can be up to the entire amount of the investment.

A declaration, at around five pages in anticipated length, is expected to be easier to prepare than the typically much longer joint voluntary notice. CFIUS is preparing to release a declaration form for parties to use. The Pilot Program rules require fairly substantial information in a declaration, including but not limited to the following:

  • Brief description of the nature of the transaction and its structure (e.g., share purchase, merger, asset purchase)
  • The percentage of voting interest acquired;
  • The percentage of economic interest acquired;
  • Whether the “pilot program US business” has multiple classes of ownership;
  • The total transaction value;
  • The expected closing date;
  • All sources of financing for the transactions;
  • A list of the addresses or geographic coordinates of all “locations” of the“pilot program US business,” including “headquarters, facilities, and operating locations”; and
  • A complete organization chart, including information that identifies the name, principal place of business and place of incorporation of the immediate parent, the ultimate parent and each intermediate parent (if any) of each foreign person that is a party to the transaction.

After CFIUS receives a declaration, the CFIUS staff chair will initially assess its completeness and decide whether to accept it as complete. After such acceptance, CFIUS must take action within 30 days. CFIUS may either

  • Request that the parties file a full written notice;
  • Inform the parties that CFIUS cannot complete action on the basis of the declaration (and that the parties may file a full written notice);
  • Initiate a unilateral review of the transaction through an agency notice; or
  • Notify the parties that CFIUS has approved the transaction.

TAKEAWAYS

All parties to cross-border transactions involving US biotech businesses, whether mere licensing arrangements or full M&A, should carefully consider all US regulatory implications, including application of the new CFIUS rules, US export controls and related requirements. Parties to pending biotech transactions or contemplating future biotech transactions are well advised to:

  • Analyze at the outset whether the US businesses’ products and technologies are controlled under the US export control regimes and/or fall within the scope of “critical technologies”;
  • Monitor and participate in the BIS rulemaking procedure for establishing export controls on “emerging” and “foundational” technologies;
  • Determine well in advance of their transactions if the new Pilot Program rules apply, requiring a mandatory declaration filing and review by CFIUS;
  • Establish deal terms and conditions with a full understanding of how the various US requirements apply; and
  • Monitor continuing regulatory developments, as the new CFIUS Pilot Program will be supplanted by final CFIUS regulations to be issued by February 2020.
© 2018 McDermott Will & Emery

CMS Proposes to Overhaul the Medicare Shared Savings Program

On August 9, 2018, the Centers for Medicare and Medicaid Services (CMS) issued a proposed rule to overhaul the Medicare Shared Savings Program (MSSP). The proposal, titled “Pathways to Success,” would make significant changes to the accountable care organization (ACO) model at the heart of the program. The proposed changes include a restructuring of the current ACO risk tracks, updating spending benchmarks, increased ACO flexibility to provide care, as well as changes to the electronic health records requirements for ACO practitioners.

Background

There are currently 561 Shared Savings Program ACOs serving over 10.5 million Medicare fee-for-service (FFS) beneficiaries. Under the MSSP, ACOs are assessed based on quality and outcome measures, and by comparing their overall health care spending to a historical benchmark. ACOs receive a share of any savings under the historical benchmark if they meet the quality performance requirements.

Currently, the MSSP allows ACOs to participate in one of three “tracks.” Track 1 is a “one-sided” model, meaning that participating ACOs share in their savings, but are not required to pay back spending over the historical benchmark. Track 2 and Track 3 are “two-sided” models, meaning that participating ACOs share in a larger portion of any savings under their benchmark, but may also be required to share losses if spending exceeds the benchmark. Currently, the vast majority of ACOs participate in Track 1.

Restructuring the Tracks

CMS proposes retiring Track 1 and Track 2, creating a BASIC track, and renaming Track 3 the ENHANCED Track. CMS describes the BASIC track as a “glide path” that will help ACOs transition to higher levels of risk and potential reward.  To that end, the BASIC track contains five levels that ACOs would transition through over the course of a five year contract period, spending a maximum of one year at each level. The first two years would involve upside-only risk, with a transition to increasing levels of financial risk in the remaining three years. Current Track 1 ACOs will be limited to one-year of upside-only participation before taking on downside risk. This is a substantial acceleration from the current Track 1 Model, which permits ACOs to avoid downside risk for up to six years.

Finally, the proposed rule draws a distinction between low revenue ACOs and high revenue ACOs. Low revenue ACOs (typically composed of rural ACOs and physician practices) would be permitted to spend two 5-year contract periods on the BASIC track. High revenue ACOs (typically composed of hospitals) would be permitted only one 5-year contract period on the Basic track.

Source: Proposed Rule: Medicare Program; Medicare Shared Savings Program; Accountable Care Organizations–Pathways to Success

Updating the Historical Spending Benchmarks

Every year, an ACO’s spending is comparing to its historical benchmark to determine the ACO’s participation in any shared savings or losses. Under the proposed rule, the benchmark methodology will incorporate regional FFS expenditures beginning in the first contract period. Also, the historical benchmark will be rebased at the beginning of each 5-year contract period. Adjustments to the benchmark related to regional expenditures will be capped at 5% of the national Medicare FFS per capita expenditure. According to CMS, these changes will improve the predictability of historical benchmark setting and increase the opportunity for ACOs to achieve savings against the historical benchmark.

Expanding ACO Flexibility in Beneficiary Care

The proposed rule contains several changes to the MSSP aimed at increasing the flexibility of ACOs to provide cost-effective care to their assigned beneficiaries. For example, to support the ACO’s coordination of care across health care settings, ACOs will be eligible to receive payment for telehealth services furnished to prospectively assigned beneficiaries even when they would otherwise be prohibited based on geographic prerequisites. The proposed rule also expands the Skilled Nursing Facility (SNF) 3-Day Rule Waiver to all ACOs in two-sided models. This waiver permits Medicare coverage of certain SNF services that are not preceded by a qualifying 3-day inpatient hospital stay.

Finally, the proposed rule permits ACOs in two-sided models to reward beneficiaries with incentive payments of up to $20 for primary care services received from ACO professionals, Federally Qualified Health Centers, or Rural Health Clinics.

Changing Electronic Health Record Requirements

Currently, one of the quality measures for which ACOs are assessed relates to the percentage of participating primary care providers that successfully demonstrate meaningful use of an electronic health records system for each year of participation in the program. The proposed rule eliminates this measure. Instead, CMS proposes to adopt an “interoperability criterion” that assesses the use of certified electronic health record technology for initial program participation and as part of each ACO’s annual certification of compliance with program requirements.

Commentary

CMS’s proposal is not surprising in light of CMS Administrator Seema Verma’s recent comments about upside-only ACOs. At an American Hospital Association annual membership meeting this past spring, Administrator Verma is quoted as saying:

[T]he majority of ACOs, while receiving many waivers of federal rules and requirements, have yet to move to any downside risk.  And even more concerning, these ACOs are increasing Medicare spending, and the presence of these ‘upside-only’ tracks may be encouraging consolidation in the market place, reducing competition and choice for our beneficiaries.  While we understand that systems need time to adjust, our system cannot afford to continue with models that are not producing results.

Though the rule is only a proposal at this time, the above comments illustrate that CMS is serious about requiring providers to be more financially accountable for the care of their patients. And the agency is clear-eyed about the short-term impact of the proposal, estimating that more than 100 ACOs will exit the MSSP over the next 10 years if the proposal is finalized.  The agency nevertheless believes that the new program would be attractive to providers due to its simplicity (as compared to the current program) and the new opportunity it offers clinicians to qualify as participating in an Advanced Alternative Payment Model (APM) when they reach year 5 of the BASIC track. APMs are an important concept under the Quality Payment Program (QPP) that was ushered in by the Medicare Access and CHIP Reauthorization Act of 2015. Clinicians participating in an Advanced APM are exempt from reporting under the QPP’s Merit-based Incentive Payment System (MIPS) and are eligible for certain financial incentives. The fates of the MSSP and the QPP are thus intertwined, and the co-evolution of the programs is at a critical stage, especially in light of CMS’s July release of a proposed rule modifying the QPP. We will continue to report on the developments of both of these programs.

 

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