Category: Health Care Law

Obama Administration Aims to Restrict Physician Self-Referrals for Certain In-Office Services in Proposed Budget

Barnes & Thornburg

In its recently unveiled budget proposal for fiscal year 2014, the Obama administration has proposed saving billions in federal expenditures by tightening restrictions on certain services for which physicians can self-refer patients and receive government payment.

Under current federal law, a physician cannot make a referral to an entity for the furnishing of “designated health services” payable by government-funded health programs, such as Medicare, if the physician has a financial relationship with the entity. Correspondingly, this law—the “Stark Law”—also prohibits the entity receiving the referral from submitting a claim for payment for such services. Several exceptions, however, punctuate these prohibitions, including the “in-office ancillary services” exception, which shields referrals within physician practice groups for designated health services that meet specified criteria regarding the individual who furnishes the services, the location where the individual furnishes the services, and the party that bills for the services.

In an overview of the President’s 2014 budget plan for health care spending, the U.S. Department of Health and Human Services (HHS) notes that there are “many appropriate uses” for the in-office ancillary services exception, which the agency describes as designed to allow physicians to “self-refer quick turnaround services.” But, the agency cautions, some physicians have relied on the exception for certain services, such as advanced imaging and outpatient therapy that “are rarely performed on the same day as the related office visit.” Additionally, HHS claims, evidence suggests that the exception may have spurred “overutilization and rapid growth” of these services.

In light of these findings, the Obama administration has recommended excluding radiation therapy, therapy services (such as physical therapy and occupational therapy), and advanced imaging (such as CT scans and MRIs) from the in-office ancillary exception to encourage “more appropriate use of select services,” as HHS explains in the health spending overview. Notably, however, the administration would not extend this exclusion to “cases where a practice meets certain accountability standards,” which the HHS Secretary would have the authority to define, presumably before the exclusion would take effect in calendar year 2015 as the administration intends. Amending the Stark Law exception in this fashion would yield $6.1 billion in federal savings over 10 years, according to the administration.

Providers of the in-office services identified by the Obama administration should follow closely to see if the administration’s suggested change to the Stark Law makes it into the final budget and, if so, how the HHS Secretary ultimately defines the “accountability standards” that could make the difference between staying within the boundaries of the law and falling outside of them.

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Protections to Be Extended for Electronic Health Record Donations

Morgan Lewis logo

CMS and OIG issue similar proposed rules to modify the electronic health record exception and safe harbor.

On April 10, the Centers for Medicare & Medicaid Services (CMS) and the Office of Inspector General (OIG) of the Department of Health and Human Services published nearly identical proposed rules in the Federal Register to revise and extend protections for certain arrangements involving the donation of electronic health record (EHR) items and services (Proposed EHR Donation Rules).[1] The Proposed EHR Donation Rules will be open for comments until June 7. Both CMS and OIG note that their proposed rules mirror one another in an effort to “ensure as much consistency as possible between [the] proposed . . . changes, despite the differences in the respective underlying statutes.” CMS and OIG also note that they will consider comments submitted to the other agency in creating their respective final rules.

EHR Exception and EHR Safe Harbor

In August 2006, CMS and OIG simultaneously published final rules establishing an exception to the federal Physician Self-Referral (Stark) Law (EHR Exception)[2] and a safe harbor to the federal Anti-Kickback Statute (AKS) (EHR Safe Harbor).[3] The EHR Exception and the EHR Safe Harbor protect certain arrangements related to the donation of interoperable EHR software technology and training services, and both are supposed to sunset on December 31, 2013. The EHR Exception and the EHR Safe Harbor established requirements addressing who could donate EHR software and training services, what items and services could be included in the donation, and other conditions necessary to comply with the EHR Exception and the EHR Safe Harbor.

Proposed Revisions to the EHR Exception and the EHR Safe Harbor

If finalized, under the Proposed EHR Donation Rules, CMS and OIG would amend certain requirements of the EHR Exception and the EHR Safe Harbor, as summarized below.

  • Extension of the Sunset Date: The sunset date would be extended to December 31, 2016. Neither CMS nor OIG favors eliminating the sunset provisions altogether, stating that the need for an exception for donations of technology should continue to diminish over time. CMS and OIG note that the December 31, 2016, date corresponds to the last year that Medicare EHR incentive payments will be available and the last year to initiate participation in the Medicaid EHR program.
  • Modification of the Interoperability Requirement: Under the current EHR Exception and EHR Safe Harbor, the donated EHR must be interoperable. EHR is “deemed” to be interoperable if it attained certification within one year prior to the date of donation. CMS and OIG propose to update this provision to reflect that the Office of the National Coordinator for Health Information Technology (ONC) is responsible for “recognizing” certifying bodies. To integrate the ONC’s process for adopting certification criteria and standards, which is anticipated to occur on a two-year interval, the current 12-month time line for certification would be removed. A new provision that “more closely tracks the current ONC certification [provision]” would be substituted. Specifically, software would be eligible for deeming if, on the date of donation, “it has been certified to any edition of the electronic health record certification criteria that is identified in the then applicable definition of Certified EHR Technology.”
  • Removal of E-Prescribing Capability Requirement: CMS and OIG also propose to remove the electronic prescribing capability requirement from the EHR Exception and the EHR Safe Harbor as a requirement for software and training services being eligible for donation. In light of the “meaningful use” standard promulgated under the Health Information Technology for Economic and Clinical Health Act and the progress related to electronic prescribing (e-prescribing) made by the industry, CMS and OIG note that the e-prescribing requirement is no longer necessary to achieve the goal of adopting e-prescribing capabilities for EHR records.
  • Additional Proposals and Considerations: The Proposed EHR Donation Rules include the following alternatives to amend EHR Exception and EHR Safe Harbor provisions for which CMS and OIG are seeking public comments:
    • Protected Donors: CMS and OIG propose to limit the scope of protected donors. One proposal would include only the original Medicare Modernization Act–mandated donors, i.e., hospitals, group practices, prescription drug plan sponsors, and Medicare Advantage organizations. Alternatively, CMS and OIG are considering excluding only specific types of donors but retaining the current definition of “protected donors.” Potential targets for exclusion would include (i) laboratory companies, (ii) durable medical equipment suppliers, and (iii) independent home health agencies. This proposed revision was prompted, in part, by concerns that abusive donations are being made—i.e., donors are using the EHR Exception and the EHR Safe Harbor to provide referral sources with items and services that appear to support the interoperable exchange of information but which instead lead to referrals and data lock-in.
    • Data Lock-In and Exchange: CMS and OIG also note that they are considering new or modified conditions to add to the existing EHR Exception and EHR Safe Harbor that would achieve the dual goals of (i) preventing the misuse of the EHR Exception and the EHR Safe Harbor in a way that results in data and referral lock-in and (ii) encouraging the free exchange of data. For example, CMS states in its proposed rule that “it has been suggested that even when donated software meets the interoperability requirements of the rule, policies and practices sometimes affect the true ability of electronic health record technology items and services to be used to exchange information across organizational and vendor boundaries.”
    • Covered Technology: CMS and OIG are seeking comments regarding the modification of the regulatory text of the EHR Exception and the EHR Safe Harbor to enumerate those items or services that fall within the scope of covered technology for purposes of the EHR Exception and the EHR Safe Harbor.

Given that there is no requirement for parties to an arrangement to comply with the requirements of an AKS safe harbor, the proposed revisions to the EHR Exception may be more relevant for those designated health entities that have or may plan to donate EHR items and services to physicians who refer Medicare beneficiaries to their institutions. This is particularly the case if the agencies finalize the proposed revision to the definition of an “eligible donor” when an entity removed from the list of protected donors has or is in the process of donating EHR items and services.

[1]. Physicians’ Referrals to Health Care Entities With Which They Have Financial Relationships: Exception for Certain Electronic Health Records Arrangements, 78 Fed. Reg. 21,308 (Apr. 10, 2013) (to be codified at 42 C.F.R. pt. 411), available here; Electronic Health Records Safe Harbor Under the Anti-Kickback Statute, 78 Fed. Reg. 21,314 (Apr. 10, 2013) (to be codified at 42 C.F.R. pt. 1001), available here.

[2]. 42 C.F.R. § 411.357(w).

[3]. 42 C.F.R. § 1001.952(y).

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Will Nonprofit Hospitals Disappear Under Obamacare?

LRLOGO

It seems everyone has an opinion on Obamacare, officially the Patient Protection Affordable Care Act. The good, the bad and the ugly have been exposed at the individual patient level. But as the January 1, 2014 implementation date approaches, how will the law affect hospitals, and what ramifications will it have on their patients and communities?

Some Wall Street analysts are now bullish on investing in hospital systems, betting that more people covered by insurance equates to more paying patients and thus more revenue, speaking, of course about for profit institutions.

According to the U.S. Census Bureau, nearly 85 percent of people in the U.S. –over 260 million—were covered by insurance in 2011, with about 32 percent of that number on government health insurance such as Medicare or Medicaid. If, as planned, “everyone” will be covered under PPACA, another 46.5 million patients will obviously make a significant financial impact on the healthcare system.

How will this dynamic affect the nation’s roughly 2,900 nonprofit hospitals? These hospitals have long enjoyed tax exempt status with the Internal Revenue Service under 501(c)(3) relying on the common law definition of charity, where the promotion of health is considered a charitable endeavor. These nonprofit institutions provide charitable, or uncompensated care as well as a host of other services that qualify them as nonprofit, and hence, federal tax exempt entities.

Requirements and guidelines

Nonprofit hospitals have always been required to meet certain parameters to maintain their tax exempt status. Providing a certain level of charity care and using surplus funds to offer continuing education for healthcare professionals, conduct medical research and run preventive health outreach programs in their communities are a few examples.

Under the new law, a rigorous new provision in section 501 of the Internal Revenue Code called subsection (r) goes into effect regarding treatment of uninsured patients. Although not spelled out with specific IRS guidance as of yet, failure to comply can result in a new $50,000 annual excise tax.

Four new requirements must now be met in order for hospitals to maintain their tax exempt status with the IRS. Here is a brief synopsis of each:

1. Community health needs assessment
Hospitals must produce a community health needs assessment based on an assessment done every three years. Specific terms spell out everything that must be included in this document, such as the sources used to conduct the assessment and methods employed, input from community representatives, a prioritized description of the community’s health needs and of existing local healthcare facilities and other resources. This written community healthcare assessment must be widely available. A written implementation strategy to meet the needs identified in the community health needs assessment is also required.

2) Financial assistance policy
Hospitals must create a written financial assistance policy. It must be widely publicized and include eligibility criteria and whether assistance includes free or discounted care, how amounts charged are calculated, how to apply and what documentation will be used to determine qualification. It’s worth noting that there is no correlation between the community health needs assessment and the financial assistance plan requirements. In other words, a hospital does not have to tailor its financial assistance plan to the findings of the community health needs assessment.

3) Limitations on charges
In the past, it was common practice for hospitals to charge uninsured patients substantially more for care than their insured counterparts. They must now limit charges for emergency or medically necessary care to the rates generally billed to insured individuals. They cannot charge more than the gross charges for non-emergency care. One of two prescribed methods for determining amounts billed must be used: one based on past payments by Medicare fee-for-service or Medicare FFS plus private health insurers’ payments; or an estimate of the amount the hospital would be paid by Medicare and a Medicare beneficiary for the care if the patient was a Medicare FFS beneficiary.

Patients not eligible for financial assistance, or those who have not submitted an application for assistance, may still be charged gross charges for all (not just emergency) hospital care.

4) Billing and collections practices
The PPACA prohibits hospitals from engaging in extraordinary collections actions in certain instances. “Extraordinary collections actions” relate to obtaining payment of a bill for care covered under the hospital’s financial assistance plan that requires legal or judicial process. Hospitals cannot report adverse information to consumer credit reporting agencies if an individual qualifies for the financial assistance plan. And, selling debt of individuals on the financial assistance plan is prohibited.

Hospitals have to make reasonable efforts to determine whether an individual qualifies under the financial assistance plan before engaging in extraordinary collections efforts, including notifying individuals about the financial assistance plan, providing assistance to an individual who submits an incomplete application and determining and documenting whether an individual qualifies for the plan. The hospital may use extraordinary collections actions if all of these requirements are met.

Nonprofit hospitals on the line

Some nonprofit hospitals are being consolidated and acquired by larger for profit systems. Although not tax exempt, it’s been shown that for profit systems typically provide a comparable amount of charity care as nonprofit hospitals do.

Nonprofit hospitals should be advised that the new PPACA requirements will play a significant role in how they operate and report, specifically when it comes to billing and collections for services provided to the uninsured. The new law leaves many gray areas and hospitals themselves will have to establish eligibility criteria for financial assistance. Following the new procedures as best they can will ensure the best chance of maintaining their tax exempt status.

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Final Rule for Physician Payments Sunshine Act Recently Released

McBrayer

The long-awaited final regulations for the Physician Payments Sunshine Act (“Sunshine Act” or “Act”) were finally released on February 1, 2013. I previously discussed the Sunshine Act (see Here Comes the Sun, Are you Prepared?,10/18/2012), but with the final rule now implemented, providers should take a second look at it and reconsider its implications.

The Act requires 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. Additionally, applicable manufacturers and group purchasing organizations (“GPOs”) must annually report to CMS certain information regarding ownership or investment interests held by physicians (or their immediate family members).

The Act was proposed in December 2011 and CMS had expected to issue the final rule by the end of 2012. However, due to the overwhelming number of remarks received during the comments period from concerned providers, manufacturers, and GPOs, the Act took considerably more time to become final.

The final rule addresses some of the concerns raised through the comments period, but certainly not all. One of the biggest revisions is to exempt speaker fees for accredited and certified CME programs from the reporting requirements. There are several other exemptions from the reporting requirements, including, but not limited to:

  • over-the-counter drugs and class I and II medical devices (such as elastic bandages and suture materials)
  • incidental items worth less than $10 (e.g., pens and note pads) as well as general food and drinks offered to all participants at conferences or large-scale events
  • gifts or payments valued at less than $10 — unless the aggregate amount paid to the physician exceeds $100 annually
  • educational materials and items intended for use by or with patients

Additionally, the final rule makes numerous changes to definitions included in the proposed rule and adds several new terms.

The estimated costs, as stated by CMS, for the manufacturers and GPOs to comply with the Act is $269 million for the first year, with costs thereafter estimated to be $180 million.  CMS estimates physicians will expend $250 during the first year for compliance, but many stakeholders have expressed the opinion that this is grossly underestimated.

The applicable manufacturers and group purchasing organizations are required to start collecting data on August 1, 2013. This data must be formalized in a report to CMS by March 31, 2014. The data is set to appear on a public website by September 30, 2014.

The final rule still creates a great deal of uncertainty. It is highly recommended that providers consider their existing relationships and revisit the Act when creating new ones. They should take time to review internal policies and examine all contacts for conflicts of interest.

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Internal Revenue Service (IRS) Capitalized Legal Fees Incurred by Pharmaceutical Company

 

McDermottLogo_2c_rgbIn a recently released Field Attorney Advice, the Internal Revenue Service (IRS) Office of Chief Counsel concluded that a pharmaceutical company must capitalize legal fees incurred to obtain Food and Drug Administration approval for marketing and selling generic drugs and to prevent the marketing and sale of a competing generic drug.  The IRS Office of Chief Counsel also concluded that it could impose an adjustment on audit to capitalize legal fees that the taxpayer expensed in prior years, including years closed by statute of limitations.

In a recently published Internal Revenue Service (IRS) Field Attorney Advice (FAA 20131001F, March 8, 2013), the IRS Office of Chief Counsel concluded that a pharmaceutical company must capitalize legal fees incurred to obtain U.S. Food and Drug Administration (FDA) approval for marketing and selling new generic drugs and to prevent the marketing and sale of a competing generic drug.  The IRS also concluded that the Commissioner could change the taxpayer’s method of accounting for the legal fees and impose an adjustment on audit to capitalize legal fees that the taxpayer expensed in prior years, including years closed by the statute of limitations.

NDA and ANDA

In order to market or sell a new drug in the United States, a New Drug Application (NDA) must be submitted to and approved by the FDA.  An NDA consists of clinical and nonclinical data on the drug’s safety and effectiveness, as well as a full description of the methods, facilities and quality controls employed during manufacturing and packaging.  An NDA also must disclose all the patents that cover the drug.

To market or sell a generic version of an existing FDA-approved drug, the maker of the generic drug must submit an Abbreviated New Drug Application (ANDA) for FDA approval.  An ANDA generally is not required to include preclinical and clinical trial data to establish safety and effectiveness.  Instead, an ANDA applicant must show that its generic drug is bioequivalent to an existing drug.  In addition, an ANDA applicant is required to provide certification that the ANDA will not infringe on the patent rights of a third party.  Specifically, if an applicant seeks approval prior to the expiration of patents listed by the NDA holder, then a “paragraph IV certification” must be submitted by the applicant to certify that it believes its product or the use of its product does not infringe on the third party’s patents, or that such patents are not valid or enforceable.  The first generic drug applicant that files an ANDA containing a paragraph IV certification is granted, upon approval, 180 days of marketing exclusivity.

For an ANDA with a paragraph IV certification, the applicant must send notices to the NDA holder for the referenced drug and to all patentees of record for the listed patents within 20 days of FDA notification that the ANDA is accepted for filing.  If neither the NDA holder nor the patent holders bring an infringement lawsuit against the ANDA applicant within 45 days, the FDA may approve the ANDA.  If the NDA holder or the patent holders file a patent infringement lawsuit against the ANDA applicant within 45 days, a stay prevents the FDA from approving the ANDA for up to 30 months.  If, however, the patent infringement litigation is still ongoing after the 30 months, the FDA may approve the ANDA.

The Facts

The taxpayer is a pharmaceutical company engaged in developing, manufacturing, marketing, selling and distributing generic and brand name drugs.  In the process of filing ANDAs with a paragraph IV certification, the taxpayer incurred legal fees in lawsuits filed by patent and NDA holders for patent infringement.  In addition, the taxpayer as an NDA holder incurred legal fees in a lawsuit it filed against an ANDA applicant with a paragraph IV certification to protect its right to sell its branded drug until all patents expired.  The taxpayer sought to deduct its legal fees as ordinary and necessary business expenses.

The IRS Analysis

Legal Fees Incurred in the Process of Obtaining FDA Approval of ANDAs

The IRS concluded that the legal fees incurred by the taxpayer as an ANDA applicant to defend actions for patent infringement in the process of filing the ANDA with paragraph IV certification must be capitalized under Treas. Reg. § 1.263(a)-4.  The IRS characterized the fees as incurred to facilitate the taxpayer obtaining the FDA-approved ANDAs with paragraph IV certification, which granted the applicant the right to market and sell a generic drug before the expiration of the patents covering the branded drugs, and by filing early, potentially with a 180-day exclusivity period.  As such, the IRS concluded, the fees are required to be capitalized as amounts paid to create or facilitate the creation of an intangible under Treas. Reg. § 1.263(a)-4(d)(5).  In so concluding, the IRS rejected the taxpayer’s argument that its fees did not facilitate obtaining FDA-approved ANDAs because it could have commercialized its generic drugs after the 30-month stay expired regardless of the outcome of the lawsuits.  The IRS reasoned that the filing of the ANDAs with paragraph IV certification and the defense of the patent infringement lawsuit were a part of a series of steps undertaken in pursuit of a single plan to create an intangible.

The IRS further concluded that the cost recovery of the capitalized legal fees incurred to obtain the FDA-approved ANDAs must be suspended until the FDA approves the ANDAs, and the capitalized fees must be amortized on a straight-line basis over 15 years as section 197 intangibles.

Legal Fees Incurred to Protect Its Right Against Other ANDA Applicants with Paragraph IV Certification

With respect to the legal fees incurred by the taxpayer as an NDA holder in the litigation against another ANDA applicant, the IRS characterized the fees incurred to defend the validity of the patents owned by the taxpayer as amounts paid to defend or perfect title to intangible property that are required to be capitalized under Treas. Reg. § 1.263(a)-4(d)(9).  In contrast, the fees incurred by the taxpayer in the litigation relating to determining whether valid patents have been infringed are not required to be capitalized under Treas. Reg. § 1.263(a)-4(d)(9).

The IRS further concluded that the capitalized fees incurred to protect the patents and the FDA-approved NDA must be added to the basis of the patents to be depreciated under section 167.  The cost recovery begins in the months in which the legal fees were incurred and is allocated over the remaining useful lives of the patents.

In characterizing the legal fees incurred by the taxpayer in defending the validity of its patents as costs of defending or perfecting title to intangible property, the IRS distinguished the legal fees at issue from the litigation expenses incurred by the taxpayers in defending a claim that their patents were invalid in Urquhart v. Comm’r, 215 F.2d 17 (3rd Cir. 1954).  In Urquhart, the taxpayers were participants in a joint venture that was engaged in the business of inventing and licensing patents.  The taxpayers obtained two patents involving fire-fighting equipment and, after threatening litigation against Pyrene Manufacturing Company, brought an infringement suit against a customer of Pyrene, seeking an injunction and recovery of profits and damages.  The case was dismissed, and Pyrene subsequently commenced an action against the taxpayers seeking a judgment that the taxpayers’ patents were invalid and that its own apparatus and methods did not infringe the patents.  A counterclaim was filed for an injunction against infringement, and an accounting for profits and damages.  Pyrene did not raise any questions as to title to, or ownership of, the patents and was successful in the lawsuit.  The patents held by the taxpayers were found to be invalid.  In holding that the legal fees incurred by the taxpayer were deductible as ordinary and necessary business expenses, the U.S. Court of Appeals for the Third Circuit rejected the IRS’s contention that the litigation was for the defense or protection of title.

Distinguishing the FAA from Urquhart, the IRS focused on the fact that the taxpayers in Urquhart were professional inventors engaged in the business of exploiting and licensing patents, and that Urquhart involved the taxpayers’ claims for recovering lost profits.  By emphasizing that Pyrene did not raise any issue as to title to the patents in Urquhart, the IRS seemed to ignore the fact that, like the taxpayer in the FAA, Pyrene sought a judgment on the validity of the taxpayers’ patents and that the outcome of the litigation in Urquhart also focused on the validity of the patents.

Change of Accounting Method for Legal Fees Incurred by the Taxpayer 

The IRS also concluded that the taxpayer’s treatment of its legal fess associated with each ANDA or patent as either deductible or capitalizable is a method of accounting that the Commissioner can change on an ANDA-by-ANDA or patent-by-patent basis.  The consequence of this conclusion, if valid, is that the IRS can impose on audit an adjustment to capitalize legal fees that the taxpayer deducted in prior years, including years closed by the statute of limitations.  For example, the IRS can include in the taxpayer’s gross income for the earliest year under examination an adjustment equal to the amount of the legal fees the taxpayer previously deducted, less the amount of amortization that the taxpayer properly could have taken had the taxpayer capitalized the legal fees.

A taxpayer that voluntarily changes its method of accounting, however, receives more favorable terms and conditions than a taxpayer that has its method of accounting changed by the IRS on examination.  For example, a taxpayer that changes its method of accounting voluntarily can spread the adjustment resulting from the change over four taxable years, and the first year of the adjustment is the current taxable year as opposed to the earliest open taxable year.

The publication of this FAA likely will bring the attention of examining agents to this issue.  Therefore, if a taxpayer believes it is using an improper method of accounting for legal fees (or any other item), it should carefully consider whether to voluntarily change its method of accounting before the IRS proposes to change the taxpayer’s method of accounting on examination.

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Health Care Fraud 2013 – May 15-17, 2013

The National Law Review is pleased to bring you information about the upcoming ABA Health Care Fraud Conference:

Health Care Fraud May 15-17 2013

May 15 – 17, 2013

Where

  • Eden Roc Renaissance Miami Beach
  • 4525 Collins Ave
  • Miami Beach, FL 33140-3226
  • United States of America

The 23rd Annual National Institute on Health Care Fraud provides a rewarding educational experience for health care attorneys, regulators, prosecutors, criminal defense attorneys, and qui tam relators’ counsel. This National Institute draws panelists, facilitators, and participants from each of these significant groups and offers unique opportunities to meet and share experiences and concerns in a non-adversarial setting.  The program planning committee is committed to creating a program that advances education, communication, professionalism, and discussion of current legal and ethical issues that arise in the health care fraud practice. These issues are addressed in panel discussions and small workshop formats designed to maximize audience participation.

340B Drug Pricing Program Notices on Group Purchasing Organizations and Medicaid Exclusion File

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Following the recent release of new Program Notices regarding the Group Purchase Organization (GPO) prohibition and Medicaid Exclusion File, 340B participating entities should review their 340B program policies and procedures to ensure compliance with new and clarified guidance regarding GPO purchasing and dispensing of 340B drugs to Medicaid patients.

On February 7, 2013, the Health Resources and Services Administration Office of Pharmacy Affairs (OPA) issued new Program Notices related to the Group Purchasing Organization (GPO) prohibition and the Medicaid Exclusion File (the Program Notice).

GPO Prohibition 

Disproportionate Share Hospitals, children’s hospitals and freestanding cancer hospitals that participate in the 340B program are prohibited from purchasing “covered outpatient drugs” through a GPO or other group purchasing arrangement.  Covered outpatient drugs include most outpatient drugs obtained by written prescription, with the exception of vaccines and certain drugs classified as devices by the U.S. Food and Drug Administration.

Prior to the release of the new Program Notice, OPA had provided little guidance regarding the scope and enforcement of the GPO prohibition.  The Program Notice appears to have resulted from OPA concern that certain hospitals may have been routinely using outpatient GPO accounts when unable to purchase drugs at 340B prices.  With the Program Notice, OPA has now formally established policies regarding the application of the GPO prohibition to drug shortages, outpatient clinics and virtual inventory/replenishment purchasing models.

With the new Program Notice, and accompanying FAQs released subsequent to the publication of the Program Notice, OPA advises that the GPO prohibition applies even when a covered outpatient drug is not available at the 340B price due to a manufacturer shortage.  In such cases, hospitals are instructed to notify OPA of the issue, but may not obtain the drug through a GPO.

The Program Notice also provides that the GPO prohibition does not extend to certain off‑site outpatient clinics.  A hospital may use a GPO to purchase covered outpatient drugs for an off-site outpatient clinic if all of the following requirements are met:

Further, OPA establishes that a hospital may not use a GPO to purchase covered outpatient drugs for dispensing to patients through a contract pharmacy.  This guidance does not prohibit a contract pharmacy that is not owned by a hospital (which is the entity that would be subject to the GPO prohibition) from accessing GPO pricing through its own account, so long as the hospital is not involved in the pharmacy-GPO arrangement and does not benefit from the pharmacy’s GPO pricing.

  • The off-site outpatient clinic is located at a different physical address than the hospital
  • The off-site outpatient clinic is not registered in the OPA 340B database as participating in the 340B program
  • Covered outpatient drugs for the off-site outpatient clinic are purchased through a separate pharmacy wholesaler account than the hospital
  • The hospital maintains records demonstrating that drugs purchased through a GPO for the off-site outpatient clinic are not utilized by or transferred to the hospital or any off-site outpatient location registered in the OPA 340B database

Hospitals, including their outpatient sites, subject to the GPO prohibition must discontinue GPO purchasing of covered outpatient drugs before the first day of their respective 340B program eligibility, although each may continue to dispense previously purchased GPO inventory.  Those hospitals that maintain pharmacy inventory through a virtual inventory/replenishment model, in which 340B drugs are purchased based on prior dispensing to 340B-eligible patients, are also prohibited from using a GPO to purchase covered outpatient drugs.  OPA has advised that hospitals utilizing a replenishment model in “mixed use” (inpatient and outpatient) pharmacies must now account for (“accumulate”) dispensed drugs for inventory replenishment as either inpatient, 340B-eligible or outpatient non-340B.  Drugs accumulated for outpatient non-340B replenishment may only be purchased through a non-340B, non-GPO account.  In addition, a hospital may not purchase drugs on a 340B account until the 340B-eligible accumulator reaches a full package size and/or minimum order quantity.  The result is that such drugs typically must be purchased at wholesale acquisition cost (WAC) or prices individually negotiated between the hospital and manufacturer.

The new Program Notice advises that hospitals subject to the GPO prohibition that are found in violation of the prohibition may be immediately removed from the 340B program and subject to repayment to manufacturers for the period of non-compliance.  However, in a separate FAQ on the OPA website, OPA advises that it will not enforce the GPO prohibition until after April 7, 2013.  Those hospitals that are unable to meet the compliance deadline are advised to either notify OPA of non-compliance and submit a corrective action plan (such submissions will be handled on a case-by-case basis) or disenroll either the entire hospital or, if applicable, non-compliant off-campus locations, from the 340B program.

Medicaid Exclusion File

Drug manufacturers are not required to provide a 340B discount and Medicaid rebate on the same drug.  In order to prevent these “duplicate discounts,” OPA maintains the Medicaid Exclusion File.  This database lists all 340B participating entities (covered entities) and indicates whether the covered entity has elected to dispense 340B drugs to Medicaid patients (carve-in) or obtain drugs for Medicaid patients at non-340B pricing (carve-out).  Covered entities that have elected to carve-in are listed in the Medicaid Exclusion File by Medicaid billing number.

State Medicaid programs are instructed to access the Medicaid Exclusion File to ensure they do not seek manufacturer rebates from those covered entities that are listed in the database.  In the Program Notice, OPA reminds states to use the Medicaid Exclusion File to prevent duplicate discounts and to report any discrepancies between provider billing practices and the information in the database to OPA.

The Program Notice advises covered entities of a change in OPA policy regarding the timing of changes to a covered entity’s decision to carve-in or carve-out.  While changes previously could be made at any time, OPA will now only permit changes on a quarterly basis.  OPA also clarifies that a covered entity may choose to carve-in or carve-out for a subset of 340B enrolled locations, but if it does so, must obtain a separate Medicaid provider number for any eligible locations that carve-in.  Covered entities are also reminded that they must ensure their information is accurately reflected in the Medicaid Exclusion File and that they may be subject to manufacturer repayment if the database reflects that the covered entity opted to carve-out, but the covered entity has been dispensing 340B drugs to Medicaid patients.

Next Steps

340B participating hospitals subject to the GPO exclusion should review their current operations and policies and procedures to evaluate compliance with the guidance released in the new Program Notice and FAQs, with particular attention to use of GPO purchasing to obtain covered outpatient drugs that are not available at 340B pricing and for replenishment inventory.  As necessary, hospitals should cease purchasing covered outpatient drugs through a GPO and begin revising purchasing procedures to ensure compliance by April 8, 2013.

Hospitals should also evaluate current policies regarding use of GPOs at off-site outpatient clinics not registered in the OPA 340B database to determine whether such locations may be eligible to purchase covered outpatient drugs through a GPO.  Previously, many such off-site outpatient clinics were restricted to only purchasing at WAC pricing due to the GPO exclusion.  The new Program Notice makes clear that, so long as purchasing is conducted through a separate pharmacy wholesaler account (not the hospital’s), hospitals subject to the GPO exclusion can use a GPO to purchase drugs for off-campus outpatient clinics that are not registered in the OPA 340B database.  Therefore, outpatient sites now have the flexibility to purchase drugs through a GPO for those clinics that are not yet eligible for 340B enrollment (e.g., they have not yet appeared on a filed Medicare cost report) and to opt-out of enrolling off-site outpatient clinic sites if certain locations would see greater benefit from GPO purchasing than from 340B participation.  Further, hospitals may wish to explore opportunities for selective enrollment of off-site outpatient locations to ensure patient access to certain drugs, such as intravenous immunoglobulin, that have historically been difficult to obtain at 340B pricing and cost-prohibitive to obtain at WAC.

All covered entities should review their information in the Medicaid Exclusion File to ensure the database reflects current Medicaid billing practices and be aware that any changes will only be effective as of the next quarter beginning January 1, April 1, July 1 or October 1.  Covered entities should also use this opportunity to review state Medicaid program requirements regarding carve-in or carve-out restrictions and billing rules related to 340B drugs.

© 2013 McDermott Will & Emery

Supreme Court Hears Oral Argument in “Pay-for-Delay” Patent Settlement Antitrust Case

The National Law Review recently published an article, Supreme Court Hears Oral Argument in “Pay-for-Delay” Patent Settlement Antitrust Case, written by Jeffrey W. Brennan and Glenn Engelmann with McDermott Will & Emery:

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On March 25, 2013, the Supreme Court of the United States heard argument on the issue of pharmaceutical patent settlement agreements between branded and generic drug companies that contain so-called “pay-for-delay” or “reverse payment” provisions. Federal Trade Commission v. Actavis, Inc., involves the Federal Trade Commission’s (FTC’s) appeal of the U.S. Court of Appeals for the 11th Circuit’s order affirming dismissal of an FTC charge that such an agreement was an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act.  Proof that an agreement between competitors is anticompetitive under Section 5 (which only the FTC may enforce) and under Section 1 of the Sherman Act (for which there is a private right of action) is essentially the same.  The Supreme Court’s ruling in FTC v. Actavis will almost certainly have major implications for the viability of FTC and private suits alleging that pay-for-delay settlements are anticompetitive, and for the level of antitrust risk facing companies that enter into such settlements.

Pay-for-delay challenges arise from settlements of patent infringement suits by branded drug patent holders against generic drug applicants under the Hatch-Waxman framework.  Two provisions must be present for the theory to apply: a restriction on generic entry until a future date (even if the entry precedes patent expiration), and payment of money or other value by the brand to the generic firm.  The payment typically is part of an ancillary agreement, such as a supply or co-promotion arrangement or IP license (coined a reverse payment because the plaintiff pays the defendant to settle).  The FTC argues that this paradigm delays competition because it likely induces the generic to settle for later entry, or would have under exclusivity provisions if it won the lawsuit.  The FTC finds the agreements presumptively unlawful and would put the burden on defendants to prove otherwise.  Defendants counter that the patent conveys a right to exclude and that these settlements promote and accelerate competition, because they enable generic entry prior to patent expiration.  Defendants assert that the burden should remain with the plaintiff to prove an anticompetitive effect.

The facts alleged in the FTC complaint squarely fit this paradigm.  The settlement occurred in 2006.  Solvay marketed branded drug Androgel.  A formulation patent claiming Androgel expires in 2020.  Generic drug firm Watson (now Actavis) had applied to the U.S. Food and Drug Administration for approval to launch a generic version of Androgel and certified that the generic product did not infringe Solvay’s patent and that the patent was invalid.  Solvay sued Watson and another firm for patent infringement, then settled.  The parties agreed that Watson would not launch its generic version of Androgel until 2015—five years prior to patent expiration—and that Watson would promote Androgel to a key customer source, urologists, and be compensated by Solvay for those services.  The agreement thus contains both components of an FTC pay-for-delay paradigm: a time-restriction on generic entry and a reverse payment.

The 11th Circuit followed its own precedent in rejecting the FTC case under the “scope-of-the-patent” test.  (The Second and Federal Circuits apply the same test.)  Under that analysis, if the patent was not obtained by fraud, and the infringement suit is not a sham (i.e., objectively baseless), then a settlement does not violate the antitrust laws if its terms do not expand the exclusionary scope of the patent, such as by prohibiting generic entry even after the patent expires.  Since the Solvay-Watson settlement provided for generic entry five years before patent expiration and did not otherwise allegedly fail the foregoing tests, the 11th Circuit affirmed dismissal of the FTC complaint.  The Supreme Court likely accepted the case because of a circuit split on this issue.  In 2012, in In re K-Dur Antitrust Litigation, in which the FTC was not a party, the Third Circuit reversed a district court and applied a legal analysis that rejects the scope-of-the-patent test and essentially adopts the FTC approach.

In the oral argument, the Justices directed a number of pointed questions and comments to each side.  As noted, the government would put the burden on defendants to show that their agreement is not anticompetitive, arguing that “agreements of this sort should be treated as presumptively unlawful, with the presumption able to be rebutted in various ways” that do not include an assessment of the patent’s validity or of the strength of the infringement claim.  Members of the Supreme Court expressed skepticism about that rule.  Justice Kennedy responded, “[t]hat’s my concern, is your test is the same for a very weak patent as a very strong patent.  That doesn’t make a lot of sense.”  Justice Scalia said that to not evaluate the strength of the patent in assessing competitive effects is to leave out “the elephant in the room.”  Justice Breyer remarked that the government proposes “a whole set of complex per se burden of proof rules that I have never seen in other antitrust cases,” adding, “I’m worried about creating some kind of administrative monster.”

Justices also had pointed comments for the companies’ counsel, particularly on whether it is appropriate to find that the patent has an absolute right to exclude even though it was being tested in court.  The companies’ counsel argued that “the patent gives the patentholder the legal right to exclude” and that unless the patent is legally unenforceable, the patentholder is “entitled to monopoly profits for the whole duration of the patent.”  Justice Sotomayor said “there is no presumption of infringement” by the generic product, “[s]o what you’re arguing is that in fact a settlement of an infringement action is now creating the presumption.”  She added, “I don’t know why we would be required to accept that there has or would be infringement by the product that has voluntarily decided not to pursue its rights.”  Justice Kagan remarked that “[i]t’s clear what’s going on here is that [the brand and generic firms are] splitting monopoly profits and the person who’s going to be injured are all the consumers out there,” and that under the companies’ proposed rule, the brand and generic firm will have the incentive “in every single case . . . to split monopoly profits in this way to the detriment of all consumers.”

The Supreme Court’s term concludes in June 2013, by which time a decision is expected.

© 2013 McDermott Will & Emery

Health Care Fraud 2013 – May 15-17, 2013

The National Law Review is pleased to bring you information about the upcoming ABA Health Care Fraud Conference:

Health Care Fraud May 15-17 2013

May 15 – 17, 2013

Where

  • Eden Roc Renaissance Miami Beach
  • 4525 Collins Ave
  • Miami Beach, FL 33140-3226
  • United States of America

The 23rd Annual National Institute on Health Care Fraud provides a rewarding educational experience for health care attorneys, regulators, prosecutors, criminal defense attorneys, and qui tam relators’ counsel. This National Institute draws panelists, facilitators, and participants from each of these significant groups and offers unique opportunities to meet and share experiences and concerns in a non-adversarial setting.  The program planning committee is committed to creating a program that advances education, communication, professionalism, and discussion of current legal and ethical issues that arise in the health care fraud practice. These issues are addressed in panel discussions and small workshop formats designed to maximize audience participation.

HIPAA Omnibus Rule Effective March 26, 2013

The National Law Review recently featured an article, HIPAA Omnibus Rule Effective March 26, 2013, written by the Health Care & Health Care Finance group with Vedder Price:

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The omnibus final rule that amends the privacy, security and enforcement rules1 promulgated under the Health Insurance Portability and Accountability Act of 1996 (the statute and rules, together, HIPAA) requires that Covered Entities revise and redistribute their notice of privacy practices (NPP). As described below, this will generally involve updating NPPs for legally required changes and redistributing the NPPs, whether by posting on an intranet site or distributing hard copies, by September 23, 2013.

The final rule became effective on March 26, 2013; however, Covered Entities have until September 23, 2013 (the compliance date), unless otherwise excepted, to bring their NPPs into compliance. Many of the changes to the NPPs are required pursuant to statutory enactments under the Health Information Technology for Economic and Clinical Health Act (HITECH Act) and the Genetic Information Nondiscrimination Act (GINA). Most new requirements are generally applicable to all Covered Entities, as defined under HIPAA, but certain requirements apply specifically to health plan Covered Entities and health care provider Covered Entities as summarized below.

New Requirements for Covered Entities’ NPPs

A Covered Entity must update its NPP to include these additional elements:

  1. A statement that certain uses and disclosures of protected health information (PHI) require an authorization from the subject individual, specifically psychotherapy notes (if recorded or maintained by the Covered Entity), PHI for marketing purposes and PHI in instances constituting the sale of PHI;
  2. A statement that uses and disclosures not addressed within the NPP require a written authorization;
  3. An acknowledgment that the individual may revoke any authorization granted for uses and disclosures requiring such authorization; and
  4. A notice of the individual’s rights following a breach of unsecured PHI, which can be sufficiently accomplished with a statement that the individual has a right to or will receive notification of a breach of his or her unsecured PHI.

Covered Entities that seek to contact individuals to raise funds for themselves must also include a notice of such intentions and of the individual’s right to opt out of such communications. However, the mechanism for opting out of fundraising communications does not need to be included in the NPP.

Specific Requirements for Health Care Providers’ NPPs

Tangential to new rights created by the final rule for individuals to restrict access to PHI, each health care provider must notify individuals of such new rights through its NPP.

  1. Notice Elements. In addition to those provisions discussed above, health care providers must include in their NPPs a statement notifying the individual of the individual’s right to restrict—and a health care provider’s affirmative obligation to agree to restrict—disclosures of PHI to the individual’s health plan where the individual has paid for the items or services out-of-pocket and in full.
  2. Distribution Methods. The final rule did not amend those provisions relating to the distribution of NPPs for health care providers; however, the preamble to the final rule did clarify the manner in which health care providers are expected to distribute NPPs by the compliance date. NPPs must be available at the delivery site, but health care providers may choose to post a summary of the policy with copies of the entire policy readily available at the patient’s request, with the exception of new patients, who must be given a complete copy and must return a good faith acknowledgment of receipt.

Specific Requirements for Health Plans’ NPPs

  1. Notice Elements. In addition to the above requirements, a health plan that uses PHI for underwriting purposes must include in its NPP a disclosure that the health plan may not use or disclose PHI that is genetic information for underwriting purposes.
  2. Distribution Methods. A health plan that currently posts its NPP on the company’s intranet site must (i) post the revised NPP (or the material changes to the NPP) on the website by September 23, 2013 and (ii) within the next annual mailing, provide the revised NPP or information about the material changes to the NPP and instructions for obtaining a copy of the revised NPP.

Alternatively, for those health plans that do not provide access to the NPP on the company’s intranet site, either (i) the revised NPP or (ii) information regarding the material change in the policy and instructions on how to obtain a copy of the revised notice must be distributed to individuals covered by the subject plan of the NPP within 60 days of such material revision. Distribution may be made via regular mail, hand delivery or, if applicable, electronic means. We anticipate many health plans will distribute a revised NPP as part of open enrollment.

Excepted Entities

The final rule exempts certain entities from specific aspects of the revised NPP provisions. Issuers of long-term care policies do not need to include notice of the restrictions on the use and disclosure of genetic information for underwriting purposes, as GINA did not apply such restrictions to these plans. As discussed above, health care providers are not required to disclose the protections afforded to individuals under GINA in NPPs, as health care providers may continue to disclose genetic information, subject to the minimum necessary requirements and in reliance upon a patient’s health plan’s exclusive obligation to comply with GINA’s restrictions on its use of and requests for such information.

Lastly, those health plans that have previously distributed NPPs in compliance with the final rule (as a result of the statutory enactment of such requirements under GINA and the HITECH Act) do not need to redistribute NPPs by the compliance date.

Action Items

Before September 23, 2013, Covered Entities should revise NPPs to be compliant with the final rule and distribute such revised NPPs in accordance with the specified distribution methods applicable to the Covered Entity. Furthermore, those health plans that have previously distributed NPPs to comply with GINA and the HITECH Act should ensure that all of the elements of the final rule, including those applicable to all Covered Entities, have been satisfied before determining that the exception granted under the final rule applies.

1 45 C.F.R. parts 160 and 164, subparts A and E, 45 C.F.R. parts 160 and 164, subparts A and C, and 45 C.F.R. parts 160, subparts C through E, respectively.

© 2013 Vedder Price