Tag: Regulatory

Estate Planning Opportunities Arising from Recent Landmark Supreme Court Decisions Concerning Marriages of Same-Sex Couples

Katten Muchin

On June 26, 2013, the US Supreme Court (the “Supreme Court”) struck down Section 3 of the federal Defense of Marriage Act (DOMA) as unconstitutional in the case of United States v. Windsor (“Windsor”). In a related case, the Supreme Court also dismissed an appeal from the federal district court ruling that struck down California’s Proposition 8 (which overturned marriages of same-sex couples in California) as unconstitutional in the case of Hollingsworth v. Perry (“Perry”), leaving intact the district court’s ruling that Proposition 8 is unconstitutional and cannot be enforced. This advisory summarizes the estate and income tax planning opportunities and other topics for consideration arising from the Windsor and Perry decisions. Married same-sex couples should consult with their advisors in light of their particular facts and circumstances in order to take maximum advantage of the change in the law. Unmarried same-sex couples should now consider whether to marry.

In Windsor, Edith Windsor and Thea Spyer, a same-sex couple, were married in Canada in 2007 after having been together in New York for over forty years. New York law did not permit marriages between same-sex couples at the time but recognized marriages of same-sex couples performed in other jurisdictions. Spyer died in 2009, and Windsor inherited all of Spyer’s estate as Spyer’s surviving spouse. However, because of DOMA, which defines “marriage” as “a legal union between one man and one woman as husband and wife” and “spouse” as “a person of the opposite sex who is a husband or a wife”, the federal government refused to recognize the couple’s marriage for federal estate tax purposes. As a result, Windsor’s inheritance from Spyer was not entitled to the unlimited marital deduction from federal estate tax that would have been available had Windsor and Spyer’s marriage been recognized by the federal government. After paying the estate taxes owed on her inheritance as a result of DOMA, Windsor sued for a refund of the estate taxes on the grounds that DOMA unconstitutionally discriminated against same-sex married couples. Windsor prevailed in the US District Court for the Southern District of New York and also in the US Court of Appeals for the Second Circuit. The Supreme Court has now agreed with Windsor, holding that “DOMA seeks to injure the very class [of married same-sex couples] New York seeks to protect. By doing so it violates basic due process and equal protection principles applicable to the Federal Government.” The Supreme Court further explained that DOMA’s “demonstrated purpose is to ensure that if any State decides to recognize same-sex marriages, those unions will be treated as second-class marriages for purposes of federal law.”

In Perry, two same-sex couples wished to become married in California. Though the California Supreme Court held in 2008 that the California Constitution required the State of California to recognize marriages of same-sex couples, California voters passed Proposition 8 later the same year, amending the California Constitution to provide that only “marriage between a man and a woman is valid and recognized in California.” As a result of Proposition 8’s passage, the two couples were unable to marry. They sued the California governor, attorney general and various other state and local officials responsible for enforcing California’s marriage laws (the “California officials”), claiming that Proposition 8 violated their rights to due process and equal protection under the US Constitution. In the US District Court for the Northern District of California (the “district court”), the California officials refused to defend Proposition 8, but the private parties who were the proponents of Proposition 8 (the “Proposition 8 proponents”) successfully intervened to defend the measure. After the district court held that Proposition 8 was unconstitutional, the California officials declined to appeal the decision and the Proposition 8 proponents appealed. The US Court of Appeals for the Ninth Circuit upheld the district court’s ruling that Proposition 8 was unconstitutional. The Supreme Court dismissed the appeal from the district court on the grounds that the Proposition 8 proponents lacked standing to appeal because they were merely private parties and were not properly authorized under state law to defend the constitutionality of Proposition 8. As a result of the Supreme Court’s ruling, the district court’s ruling that Proposition 8 is unconstitutional remains in place and California soon will be required to permit same-sex couples to marry. As a result of the Windsor decision, such marriages also will be entitled to federal recognition.

Estate Planning Opportunities Arising from Windsor 

The Supreme Court’s ruling in Windsor requires the federal government to recognize marriages of same-sex couples. Note, however, that the Supreme Court limited the scope of its decision to “lawful marriages”. Therefore, the decision likely will not be interpreted to require the federal government to recognize so-called “marriage equivalent” status that is not actually “marriage” under state law, i.e., civil unions, domestic partnerships and registered domestic partnerships. The District of Columbia and thirteen states permit marriages of same-sex couples. Those states are California (effective once the stay issued by the Ninth Circuit is lifted pursuant to the Perry decision, which is likely to be imminent), Connecticut, Delaware (effective July 1, 2013), Iowa, Maine, Maryland, Massachusetts, Minnesota (effective August 1, 2013), New Hampshire, New York, Rhode Island (effective August 1, 2013), Vermont and Washington.

Another unresolved issue is whether the Supreme Court’s decision applies to married same-sex couples who lawfully married in a jurisdiction that permits marriages of same-sex couples (e.g., New York), but who are domiciled and/or resident in a state that does not permit or recognize such marriages (e.g., Texas). Accordingly, until these issues are resolved as a result of subsequent litigation, legislation and/or regulation, it is not clear whether Windsor will be interpreted also to apply to same-sex couples with a marriage-equivalent status (but not marriage) or married same-sex couples who are domiciled and/or resident in a state that does not permit and/or recognize marriages of same-sex couples.

Against that background, at a minimum, married same-sex couples domiciled and/or resident in states that permit and/or recognize marriages of same-sex couples likely will be entitled to the more than 1,000 benefits available to married opposite-sex couples under federal law. Some of those 1,000 benefits present immediate estate planning opportunities, including the following:

1. Review estate planning documents to ensure that the amount and structure of any spousal bequests remain appropriate. 

Federal recognition of marriages of same-sex couples leads to the availability of the unlimited marital deduction from federal estate tax and gift tax for transfers between same-sex spouses. Existing estate planning documents may have been drafted with the assumption that any gift or bequest to a spouse of the same sex over and above the individual’s applicable exclusion amount from federal estate tax and/or federal gift tax (the “Applicable Exclusion Amount” —currently $5,250,000, adjusted annually for inflation) would be subject to federal estate tax (currently at a maximum rate of 40%). However, that assumption is no longer true. Indeed, such gifts and bequests, if properly structured, are now entitled to the unlimited marital deduction. In addition, under the so-called “portability” provisions of federal gift and estate tax laws, under certain circumstances a surviving spouse of the same sex will also be entitled to use any portion of the deceased spouse’s unused Applicable Exclusion Amount (the “DSUE”), allowing the surviving spouse to make additional tax-free gifts and/or reduce the amount of estate taxes owed upon the surviving spouse’s death (note, however, that DSUE does not increase the surviving spouse’s applicable exemption from the federal generation-skipping transfer tax (“Federal GST Exemption”)). Accordingly, a married same-sex couple may wish to modify their estate planning documents to provide that any assets included in their estates in excess of the Applicable Exclusion Amounts will pass to the surviving spouse, either outright or in a properly structured marital trust for the spouse’s benefit, thus deferring all federal estate taxes until the death of the surviving spouse.

Estate planning documents may also be revised, if appropriate, to include a separate marital trust that is designed to permit a spouse to use any of the individual’s unused Federal GST Exemption that remains after the individual’s death.

2. Review retirement account beneficiary designations and joint and survivor annuity elections to ensure that they remain appropriate. 

A surviving spouse is entitled to roll over a decedent spouse’s retirement account into the surviving spouse’s retirement account without being required to take minimum distributions or lump sum distributions until such time as the surviving spouse ordinarily would be required to take minimum distributions (usually upon reaching age 70½). As a result of the Windsor decision, this benefit is now available to married same-sex couples. Accordingly, married same-sex spouses should consider naming each other as the beneficiary of his or her retirement accounts in order to defer income tax on the rolled over retirement account as long as possible.

With regard to any retirement plans that are covered by the Employee Retirement Income Security Act of 1974 (ERISA), the spouse of a participant in such a plan may automatically be a beneficiary of the retirement plan as a result of the Windsor decision. Accordingly, if a participant in an ERISA-covered plan (e.g., a 401(k) plan) wishes to designate someone other than his or her spouse as a beneficiary, such participant will need to obtain the consent of his or her spouse to make such a designation effective. Prior to Windsor, consent was not needed from a spouse of the same sex. However, afterWindsor, such consent is now required. Separately, if a participant previously made an election to waive joint and survivor annuity benefits after the date of the marriage, the participant may be able to make a new election at this time, and a new election may be required in order to be valid if the marriage is newly recognized under Windsor.

3. Consider replacing individual life insurance policies with survivor policies. 

Many same-sex spouses previously purchased individual life insurance policies of which the other spouse is the beneficiary (either directly via beneficiary designation or indirectly through a life insurance trust) in order to provide the surviving spouse with sufficient liquid assets that may be used to pay federal estate taxes due upon the death of the first to die. With the unlimited marital deduction and DSUE now available to married same-sex couples, as explained above, there may be little or no need for such liquidity upon the death of the first spouse to die. Thus, a married same-sex couple should consider replacing such individual policies with so-called “survivor” or “second-to-die” policies that pay benefits only upon the death of the surviving spouse. Such policies will still provide liquidity to children or other beneficiaries of the married same-sex couple and are generally less expensive than individual policies having the same death benefits.

4. Consider splitting gifts between spouses. 

Until now, each spouse could make gifts only up to the annual exclusion amount from federal gift tax and/or federal generation-skipping transfer tax (the “Annual Gift Tax Exclusion Amount” and the “Annual GST Exclusion Amount”, respectively—each currently $14,000) without using any portion of his or her Applicable Exclusion Amount. Going forward, however, each spouse may now make gifts from his or her own assets and, with the other spouse’s consent, have such gifts deemed to have been made one-half by the other spouse for purposes of federal gift tax and GST tax laws. Both spouses acting together in this way currently may give up to $28,000 to any individual without using any portion of either spouse’s Applicable Exclusion Amount (note that the Annual GST Exclusion Amount does not always apply to gifts made in trust).

5. Amend previously filed federal estate, gift and income tax returns and/or file protective claims as appropriate.

Gifts made to spouses. If one spouse previously made taxable gifts to the other spouse and reduced the donor’s Applicable Exclusion Amount by the amount that the gift exceeded the Annual Gift Tax Exclusion Amount and/or the donor’s Federal GST Exemption by the amount that the gift exceeded the Annual GST Tax Exclusion Amount, it may be possible to amend the donor’s prior gift tax returns (subject to the limitations period discussed below) and retroactively claim the marital deduction for the gifts made in those years, thus increasing the donor’s Applicable Exclusion Amount and/or reclaim the Federal GST Exemption used. By doing so, the donor may make additional tax-free gifts and/or reduce federal estate and/or GST taxes due upon his or her death. Similarly, any gift taxes or GST taxes actually paid may be refundable.

Gifts made to third parties. To the extent that either spouse previously used a portion of his or her Applicable Exclusion Amount and/or paid gift taxes or GST taxes by making gifts to third parties over and above his or her Annual Gift Tax Exclusion Amount and/or Annual GST Exclusion Amount, it may be possible to amend prior federal gift tax returns in order to retroactively split such gifts with the other spouse, thus increasing the donor’s Applicable Exclusion Amount and/or Federal GST Exemption. Again, doing so will allow the donor to make additional tax-free gifts and/or reduce federal estate taxes and GST taxes due upon the donor’s death. Similarly, any gift or GST taxes actually paid may be refundable.

Inheritances from decedent spouses. In cases where a decedent spouse’s estate paid federal estate taxes on assets that were inherited by a surviving spouse of the same sex, it may be possible to amend the decedent spouse’s federal estate tax return (subject to the limitations period discussed below) and retroactively claim a refund for the estate taxes paid. If the decedent spouse’s estate did not pay estate taxes and he or she died in 2010 or a subsequent year, under the portability provisions of federal estate tax laws, the surviving spouse may be able to claim the deceased spouse’s DSUE, thus allowing the surviving spouse to make additional tax-free gifts and/or reduce the amount of estate taxes owed upon the surviving spouse’s death (note, however, that DSUE does not increase the surviving spouse’s Federal GST Exemption).

Income taxes. Both spouses may also amend prior year income tax returns to change their filing status from single to married filing jointly and obtain a refund if the amount of tax owed based on their married filing status is less than that owed based on their prior single status.

Retroactivity. The extent to which married same-sex couples will be allowed to amend prior tax returns depends on the extent to which Windsor is applied retroactively and whether the applicable limitations period has passed with regard to each tax return (i.e., ordinarily three years from the date the tax return was originally due or filed (if on extension) or two years from the date the tax was paid, whichever is later). For example, it may no longer be possible to amend a 2009 individual income tax return due on April 15, 2010, that was not put on extension, but individual income tax returns for 2010, 2011 and 2012 likely may be amended. That said, it is conceivable that the Internal Revenue Service (IRS) will permit amendments as far back as the year of the marriage on the basis that neither spouse lawfully could have amended his or her tax returns prior to theWindsor decision. In either case, it will take some time for the IRS to develop policies and procedures to implement Windsor, and amended returns should be filed in accordance with applicable published guidance from the IRS, if available. In any situation where the limitations period is about to expire for a particular tax return, a married same-sex couple should consider filing a protective claim for a refund with the IRS in order to preserve the ability to obtain such a refund after the IRS has provided a means to amend the return.

6. Reside in a state that permits and/or recognizes marriages of same-sex couples. 

If a married same-sex couple was lawfully married in a jurisdiction that permitted the marriage but now reside in a state that does not permit and/or recognize the marriage, that couple should consider moving to a state that either permits marriages of same-sex couples or recognizes such marriages lawfully performed in other states if they wish to be certain to enjoy the federal benefits now potentially accorded to marriages of same-sex couples.

7. Non-citizen spouses should consider seeking permanent residency and/or becoming citizens. 

Until now, non-citizen spouses were not eligible for citizenship or permanent residency on the basis of their marriage to a spouse of the same sex who was a US citizen. As a result of the Windsor decision, however, non-citizens may be eligible for permanent residency and/or citizenship on that basis. Though there are many benefits to becoming a permanent resident or citizen, there are also numerous tax and non-tax consequences that should be carefully considered before making such an important decision.

Estate Planning Opportunities Arising from Perry 

California will now be required to permit marriages of same-sex couples, but other states that do not permit and/or recognize marriages of same-sex couples will not be required to do so. California married same-sex couples will enjoy all of the benefits available to married couples under federal law and thus should consider the above recommendations. In addition, married same-sex couples in California should consider the following recommendations:

1. Amend previously filed California income tax returns and/or file protective claims as appropriate. 

Married same-sex couples may be permitted to amend prior year California income tax returns to change their filing status and obtain a refund for any income taxes that were overpaid. Note that the normal limitations period for amending California returns expires four years after the original due date of the return (or the actual filing date if the return was put on extension) or one year from the date the tax was paid, whichever occurs later. If the limitations period for any particular tax return is about to expire, a married same-sex couple should consider filing a protective claim for a refund until such time as the State of California provides appropriate guidance for amending prior returns. Note that, as discussed above with regard to the limitations period for federal tax returns, it is conceivable that a married same-sex couple may be permitted to amend their returns through the first year of their marriage.

2. Amend previously filed tax returns and/or file protective claims with other states as appropriate. 

Married same-sex couples may also be entitled to amend prior gift tax and/or estate tax returns filed with other states that recognized marriage but not marriage equivalents (e.g., California registered domestic partnerships) at the time in question and receive a refund of taxes paid and/or reclaim any state gift tax and/or estate tax exemption. Again, the limitations period (if one applies) for amending such returns will vary by state. If the limitations period for any particular tax return is about to expire, a married same-sex couple should consider filing a protective claim for a refund until such time as the state provides appropriate guidance for amending prior returns.

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Senate Finance Committee Leadership Releases Tax Reform Framework

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A major step forward on tax reform occurred today with Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT) releasing their tax reform framework.  They are planning a “blank-slate” approach:  stripping the tax code of all current tax deductions, credits, and expenditures in place of a lower individual and corporate tax rate.

In their “Dear Colleague” letter sent out today, Senators Baucus and Hatch announced their plan to hold a markup on a bill after the August recess.  Members of the Senate have been invited to submit by July 26th a “wish list” of which tax provisions they would like to keep alive, and the Senators are encouraging the submission of legislative language.  This approach, requiring Senators to defend the provisions they would like retained, rather than cut breaks they don’t support, is a departure from current practice.  Baucus and Hatch did note that any benefit that ends up in the tax code will reduce the amount of revenue that could go towards reducing the overall rate or reducing the deficit.

Defense of Marriage Act (DOMA) Goes Down – Copyright Goes Up – U.S. v. Windsor, Supreme Court, No. 12-307, Decided June 26, 2013

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The Supreme Court handed down a far reaching decision throwing out an attempt by Congress to deny the benefits conferred by federal law on same sex couples legally married under state law holding that the Defense of Marriage Act (“DOMA”), as so applied, constituted a deprivation of the equal liberty of persons protected by the Fifth Amendment. In so doing, and perhaps without realizing it, the Supreme Court was also writing an important copyright case.

Much of copyright law is devoted to legal protection for intellectual property under a social contract allowing authors to exclusively benefit for a limited time from the fruits of their creative endeavors in exchange for enhancing the marketplace of ideas. The presently effective Copyright Act of 1976, and its predecessors including the Copyright Act of 1909, further establish a mechanism for succession assuring that certain defined classes of individuals, the author’s “statutory heirs”, may continue to enjoy those benefits following the author’s death. These classes generally include the author’s surviving spouse and children and, in certain circumstances, the grandchildren next of kin and/or the author’s executor. Since copyrights are expressly solely a matter of federal law for the federal courts, any such federal benefits would have likely been denied by DOMA had it survived judicial scrutiny.

For example, the renewal copyright provisions allow the recapture of a deceased author’s original term copyright (copyrights secured prior to 1978) by an author’s surviving spouse and children as a class. Should there be no surviving spouse or child, the renewal right passes to the author’s executor, if there is a will, or to the author’s next-of-kin in the absence of a will. Clearly DOMA would have denied the benefits of renewal to a surviving, non-author, gay spouse even though such was legally married under state law. What would instead have happened is that an author’s children (possibly by a first marriage) would have enjoyed the entire renewal copyright to the exclusion of the legal, non-author spouse. It should, in this regard, be noted that, much to the surprise of many estate attorneys even today, the renewal and other copyright privileges flow directly from the statute to the statutory heirs without regard to the author’s plan of testamentary distribution or the state laws of intestacy.

Another example would have been the right of termination of transfers by which the author’s statutory heirs are allowed to serve Notices of Termination on prior transferees. In most cases, the author’s surviving spouse and children must jointly exercise the termination. Of course, if DOMA had survived instead of the non-author gay spouse, the children would have exclusively owned the termination rights with no legal obligation to a possibly disfavored second spouse who might be left with nothing from the estate of his or her devoted marital partner.

Neither of these scenarios will now happen…at least not from a direct application of DOMA to the provisions of the Copyright Act. Instead, the Copyright Act will continue to neutrally apply to all legally married spouses regardless of their sexual orientation.

The children, whatever their feelings may be about their father or mother’s choice of marital partner, should not feel deprived. The Supreme Court had already long ago shown favor to them. In an often forgotten decision, De Sylva v Ballentine, 351 US 570 (1956), the Supreme Court determined that even children born out of wedlock were entitled to the benefits conferred by the copyright laws on “children” as a class. However, the Supreme Court just as clearly stated that identifying who qualified as a “child” was a matter left to the states, hence, entirely consistent with the DOMA ruling. Following, De Sylva, the New York federal appellate court, the Second Circuit, applied the ruling of the Alabama Supreme Court to hold that Cathy Yvonne Stone, the out of wedlock daughter of the famous country singer, Hank Williams, was entitled to share the benefits of Williams’ renewal copyrights. Once Alabama state law identified Stone as a legal child, the Copyright Act then extended renewal copyright benefits to her as a member of the federally defined class of “children”. Stone v. Williams, 970 F2d 1043 (2d Cir. 1992).

Trusts and Estates attorneys, however, are not entirely out of business. The DOMA decision leaves substantial need for their services if only to determine the impact on pre-planned and future estates. The Supreme Court, both in De Sylva and Windsor, has made it clear that state law still governs who will be considered a legal spouse or child. In fact, Windsor expressly leaves intact the state law provisions of DOMA. If that were not enough, the Supreme Court’s companion decision, Hollingsworth v Perry, No. 12-144, decided June 26, 2013, leaves in place a determination, under California state law, that same-sex partners could not be denied the benefits of marriage. In short, DOMA is one piece in the same-sex marriage mosaic, but not the final piece…not close to it. Instead, the Windsor and Hollingsworth decisions will only increase the need to carefully examine the impact of state law on the effective and predictable management of literary and artistic estates.

Health Care Reform Update – Week of June 24, 2013

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CMS Releases Guidance on State Alternative Applications for Health Coverage

On June 18th, the Centers for Medicare and Medicaid Services (CMS) released guidance on state alternative applications for health coverage through the ACA that will determine eligibility for enrollment in Qualified Health Plans (QHPs). In alternative applications, states must:

  • Request information necessary for determining eligibility for coverage in a QHP.
  • Minimize the burden on the applying household.
  • Rely primarily on electronic information, and only request paper documentation when necessary.

Supreme Court Rules Generic Drugmakers Not Liable for Defects

On June 24th, the Supreme Court issued a 5-4 ruling that generic drugmakers cannot be held liable for defective products as the drugs and warning labels must be exactly the same as brand name products. The case, Mutual Pharmaceutical Co. v. Bartlett, posited that even though generic companies cannot make changes to the label, they do have the discretion to pull the drug from the market. The majority, led by Justice Alito, found that federal generic law preempts state “failure to warn” law in this case. In two dissenting opinions, justices argued that the responsibility to remove the drug from the market was valid and that Congress’ intent was to preserve a role for state law in drug regulation.

Implementation of the Affordable Care Act

On June 14th, the Jobs and Premium Protection Act (H.R. 763), which would repeal a tax on health insurance plans, gained the 218 cosponsors necessary to pass the House.

On June 17th, Rep. Mark Meadows (R-NC) introduced legislation to delay implementation of the ACA until all activity by the IRS since the beginning of 2010 is audited.

On June 17th, the House Oversight and Government Reform Committee subpoenaed HHS for information on the CO-OP program of the ACA.

On June 17th, the five Democratic members of Pennsylvania’s House delegation wrote to Governor Tom Corbett (R) to urge him to expand Medicaid in the state.

On June 17th, Senators Claire McCaskill (D-MO) and Tom Coburn (R-OK) sent a letter to colleagues urging a repeal of an ACA provision that they say creates a disparity in the Medicare hospital wage index system.

On June 18th, Enroll America launched its “Get Covered America” campaign to provide uninsured individuals with more information about the ACA enrollment process.

On June 19th, Senators Susan Collins (R-ME) and Joe Donnelly (D-IN) introduced legislation to extend the definition of a full-time worker under the ACA from 30 hours to 40 hours.

On June 19th, Republicans on the Senate HELP Committee sent a letter to FDA Commissioner Margaret Hamburg with questions on why the agency is able to promote the ACA.

On June 20th, the Obama administration issued a state-by-state list of rebates that consumers will receive from insurers across the country that failed to meet ACA efficiency rules.

On June 20th, a 95-52 vote in the Maine House of Representatives fell three votes short of overriding Gov. Paul LePage’s (R) veto of Medicaid expansion.

On June 21st, four hospital organizations sent a letter to members of Congress urging for a delay to reductions to the Medicare and Medicaid Disproportionate Share Hospital (DSH) program.

Other HHS and Federal Regulatory Initiatives

On June 18th, CMS issued a bulletin for state Medicaid agencies on when funding is available for certain administrative costs related to the activities of a state Long-Term Care Ombudsman.

Other Congressional and State Initiatives

On June 17th, former CMS administrator Don Berwick announced he will run to be governor of Massachusetts.

On June 17th, the Senate unanimously passed a bill to end the ban on organ donations between people who are HIV positive.

On June 18th, the Congressional Budget Office (CBO) projected that immigration legislation currently under consideration in the Senate would result in an additional $110 billion in health care spending over 10 years.

On June 18th, the House passed a bill that would ban most abortions after 20 weeks. The legislation is expected to die in the Senate, and the White House has threatened to veto.

On June 19th, bipartisan legislation introduced in the Senate and House would allow Medicare to cover prescription drugs for chronic weight management.

On June 19th, a study published in the Journal of Infectious Diseases indicated that the human papillomavirus vaccine reduced the prevalence of HPV among teen girls by more than half.

On June 20th, Senate Majority Leader Harry Reid (D-NV) said sequester cuts to the NIH must be eliminated. He said an inconsistency of funds at NIH is discouraging organizations from applying for grants and pursuing vital research.

On June 20th, the House Ways and Means Health Subcommittee held a hearing on the 2013 Medicare Trustees Report.

Other Health Care News

On June 17th, Susan G. Komen issued a press release that Executive Director of the IOM Judith Salerno will serve as the organization’s new CEO.

On June 18th, former HHS Secretary Tommy Thompson announced the formation of the Working Group on Pharmaceutical Safety, an organization focused on compounding reform.

Hearings and Mark-Ups Scheduled

Senate

On June 24th, the Senate Homeland Security and Governmental Affairs Committee will hold a hearingtitles “Curbing Prescription Drug Abuse in Medicare.”

On June 26th, the Senate Finance Committee will hold a hearing to examine health care quality.

On June 26th, the Senate Committee on Aging will conduct a hearing on respecting patients’ wishes and advanced care planning.

House of Representatives

On June 26th, the House Energy and Commerce Subcommittee on Oversight and Investigations will hold a hearing titled “Challenges Facing America’s Businesses Under the Patient Protection and Affordable Care Act.”

On June 26th, the House Energy and Commerce Subcommittee on Health will hold a hearing titled “A 21st Century Medicare: Bipartisan Proposals to Redesign the Program’s Outdated Benefit Structure.”

On June 27th, the House Veterans’ Affairs Committee will hold a hearing to assess the VA’s capital investment options to provide veterans’ care.

On June 27th, the House Committee on Education and the Workforce will conduct a hearing to address school lunch regulations and the consequences for schools and students.

On June 27th, the House Small Business Committee will hold a hearing on mobile medical app entrepreneurs.

On June 28th, the House Energy and Commerce Subcommittee on Health will hold a hearing titled “Examining Reforms to Improve the Medicare Part B Drug Program for Seniors.”

David Shirbroun also contributed to this update.

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U.S. Supreme Court Rules on Defense of Marriage Act (DOMA) and California’s Proposition 8

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Earlier this morning, in the case of U.S. v. Windsor, the Supreme Court of the United States found Section 3 of the Defense of Marriage Act (DOMA) to be unconstitutional. In a 5-4 decision authored by Justice Kennedy, the Court ruled that Section 3 of DOMA deprived same-sex couples of the equal protection guarantee of the Fifth Amendment of the U.S. Constitution. Note that the Windsor decision only applies to Section 3 of DOMA (which previously prohibited same-sex couples from enjoying any benefit under federal law). The decision does not apply to another key provision of DOMA that allows one state to refuse to recognize same-sex marriages performed in another state.

In the separate Hollingsworth v. Perry case challenging California’s Proposition 8 (which prohibited same-sex marriages), the Court ruled that it lacked jurisdiction to rule on the constitutionality of Proposition 8. This ruling has the effect of reinstating the original opinion of the United States District Court for the Northern District of California which found Proposition 8 unconstitutional under California law and prohibited the enforcement of Proposition 8 statewide. As a result, same-sex marriages will resume in California relatively shortly (perhaps in as soon as a month). As widely expected, the Court did not declare a constitutional right to marry in all states.

For more information on these cases and the immediate impact on employee benefit programs, please join our webinar on “DOMA and Proposition 8: Immediate Implications for Employee Benefit Plan Sponsors” scheduled for July 2, 2013.

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U.S. Supreme Court Directs 5th Circuit Court of Appeals to Re-Examine University of Texas’ Race-Conscious Admissions Policies

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On Monday, June 24, 2013, the U.S Supreme Court issued a much-anticipated ruling in the first affirmative-action case since the 2003 landmark decisions of Gratz v. Bollinger and Grutter v. Bollinger.  However,  Monday’s ruling in Fisher v. University of Texas at Austin did not reach the merits of the school’s policy, holding that the 5th Circuit Court of Appeals applied the incorrect standard of review.

For academic institutions that have race-conscious admissions policies, this case does not alter the current legal requirement that such polices be “narrowly tailored” to further the compelling governmental interest of having a diverse student body.  Because the appellate court did not properly apply this “strict scrutiny” standard, the Supreme Court sent the case back to the lower court for further consideration.

In Fisher, a Caucasian applicant, Abigail Fisher, applied to the University of Texas in 2008. After being rejected for admission, Fisher sued the University, claiming that the school’s race-conscious policy violated the Equal Protection Clause of the U.S. Constitution’s 14th Amendment which requires that racial classifications be subjected to strict scrutiny.

The District Court granted summary judgment to the University. On appeal, the Fifth Circuit Court of Appeals affirmed the dismissal, deferring to what it called “a constitutionally protected zone of discretion,” and holding that Fisher could challenge only whether the University’s decision was made in good faith.

In a 7-1 decision, the U.S. Supreme Court rejected the cursory analysis of both lower courts and held that the proper standard of review must be applied.  Specifically, the Court held that the District Court and appellate court each confined their strict scrutiny analysis too narrowly.  A “meaningful” judicial review, the Court wrote, would have assessed whether the University’s admissions policy was narrowly tailored to achieve student body diversity that “encompasses a broad array of qualifications and characteristics of which racial or ethnic origin is but a single though im­portant element.”

Fisher presents the most recent challenge to academic affirmative action in the Fifth Circuit, which, in 1996, effectively banned such practices in Texas. See: Hopwood v. State of Texas, 84 F. 3d 720 (5th Cir. 1996). In 2003, the Grutter case overruled that ban and the University of Texas re-implemented a race-conscious admissions policy.

Now that the Fisher case has been remanded to the appellate level, the constitutionality of race-conscious admissions policies in state-funded academic institutions remains unchanged.  Advocates and opponents of affirmative action in public education will have to continue to wait until the Fifth Circuit completes its review and undertakes the level of strict scrutiny review required by the Equal Protection Clause.

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Increased Availability of Health Care Data Means More Oversight and More Litigation

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The increasing availability of health care claims and payment data may portend the future of government and private health care enforcement and litigation.

Data is the lifeblood of health care fraud enforcement efforts.  For many years, Medicare enforcement was hampered by CMS’s use of multiple Medicare contractors to pay and process Medicare claims.  In late 2010, I wrote about how this could change with the allocation of more than $350 million to create integrated Medicare and Medicaid databases designed to enhance government health care fraud detection and enforcement efforts.  It now appears that the future is here.

OIG Report on Medicare Part D Data

Last week, the OIG issued a Report analyzing 2009 Medicare Part D data.  The Report finds that of 1.1 million individual medical practitioners who had prescribed drugs paid for through Part D, 736 general practitioners were “extreme outliers” in terms of five key measures:

  • The average number of prescriptions written per beneficiary;
  • The number of pharmacies filling that provider’s prescriptions;
  • The percentage of prescriptions for Schedule II drugs;
  • The percentage of prescriptions for Schedule III drugs; and
  • The percentage of prescriptions for brand name drugs.

The data analysis uncovered some eye-popping statistics.   One physician was responsible for prescriptions filled by 872 different pharmacies located in 47 states and Guam, another averaged more than 71 prescriptions per individual beneficiary, and another ordered more than 400 prescriptions for each of 16 beneficiaries.  In 2009, Medicare paid more than $352 million on prescriptions written by the 736 physicians identified as extreme outliers.

The Report provides government prosecutors with a roadmap for potential enforcement.  It also illustrates what may be the future of public and private health care fraud enforcement as more and more health care payment data becomes publicly available.  Not only government prosecutors, but also individuals with their own agendas, will be able to analyze the data for aberrations and outliers.

CMS Release of Medicare Claims Processing Data

In recent months, CMS has begun publicly releasing Medicare claims processing data, including hospital charge data for specified outpatient and inpatient treatments.   Multiple media reports have already pointed out discrepancies in the hospital prices reflected in the data.  CMS promises that more health care data will be forthcoming.

Injunction on Release of Physician Payment Information Overturned

On May 31, 2013, a federal judge overturned an injunction that had been in place for 33 years, which had prevented the release of information on what Medicare pays individual physicians.   The injunction was initially issued at the request of the Florida Medical Association, which argued that release of information on what Medicare paid the physicians constituted an unwarranted invasion of personal privacy, reasoning the judge found “no longer equitable.”

Medicare Data Access Bill Introduced

After this injunction was lifted, legislation was introduced in the Senate to make Medicare payment data publicly available in a free, searchable database.  The Medicare Data Access for Transparency and Accountability Act would also affirm that data on Medicare payments to physicians and suppliers is public information, not exempt from disclosure under the Freedom of Information Act.  The bill does not address whether publication of the data constitutes public disclosure for purposes of qui tamsbrought under the federal or state false claims acts.

It is clear that through integrated databases, government investigators are gaining enhanced access to Medicaid and Medicare data that will be mined and analyzed to develop future health care enforcement cases.  It is also clear that insurers, the media, class action counsel, and potential qui tam whistleblowers also may soon be mining this newly available data to identify potential outliers and develop their own health care based litigation efforts.

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Is Regulation of Greenhouse Gases Through the Clean Air Act Becoming “Too Big to Fail”?

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In a much-publicized decision in 2007, the Supreme Court ruled that the United States Environmental Protection Agency (USEPA) is authorized to regulate greenhouse gases (GHGs) through the Clean Air Act. Massachusetts v. EPA, 549 U.S. 497 (2007). A slew of recent cases have rejected plaintiffs’ attempts to assert common law claims for damages based on the consequences of past emissions of GHGs. The courts generally have found that USEPA has occupied the role of regulating GHGs, and challenges to the agency’s actions must be brought through the appropriate administrative channels. As the Supreme Court weighs whether to grant certiorari in the Coal. for Responsible Regulation, Inc., et al. v. EPA, No. 09-1322 (D.C. Cir. June 26, 2012), the case that addresses four USEPA GHG rules, the Supreme Court may have difficulty in changing course from the idea that GHGs should be regulated pursuant to the Clean Air Act.

Comer v. Murphy Oil et al., No. 12-60291 (5th Cir. May 14, 2013).

In the aftermath of Hurricane Katrina, Mississippi Gulf residents sued numerous energy companies, alleging that the defendants’ emissions of GHGs exacerbated the severity of and damage caused by the Class 5 hurricane (hereinafter Comer I). The claims ranged from public and private nuisance, trespass and negligence, to fraudulent misrepresentation and conspiracy. The district court dismissed Comer I with prejudice, finding that the plaintiffs had no standing to bring these claims and the claims were non-justiciable because they involved a political question.

Comer I became mired in technical details and procedures, and ultimately the plaintiffs tried to refile the case to bring an entirely new lawsuit, Comer II. The Fifth Circuit dismissedComer II because the plaintiffs brought the same claims they alleged in Comer I, and the district court had already dismissed those claims on the merits. The court applied the doctrine of res judicata, which bars parties from litigating the same claim a second time, and, consequently, Comer II was barred by the district court’s original dismissal in Comer I. Because Comer I held that plaintiffs have no standing to challenge GHG emissions through common law claims, it supports the idea that GHGs should be regulated through the Clean Air Act, rather than addressed through litigation.

Native Village of Kivalina v. ExxonMobil Corp. et al., No. 09-17490 (9th Cir. Sept. 21, 2012).

Kivalina is a village located on the far northwest shore of Alaska. The village had long been protected by the winter ice that persisted and protected the land mass itself. Due to melting icebergs and rising sea levels, the village land mass is eroding, and remains unprotected by the ice wall for much of the year. The village almost certainly will be either eroded into nothingness or inundated by the Arctic Ocean in the next twenty years. Kivalina sued a large group of energy companies, alleging that the GHGs emitted by them resulted in global warming and their village’s imminent destruction. Under a theory of common law public nuisance, the village sought damages to allow the relocation of the community.

The District Court held that political questions such as those raised by the allegations were not justiciable. Further, the court held the plaintiffs lacked Article III standing because they could not show that the named defendants likely caused the injuries, nor could the injuries be traced to an act of any of the defendants.

The Ninth Circuit agreed but expounded on the role of federal common law in pollution cases. The Court noted that federal common law has developed to fill gaps arising in cases of transboundary pollution and that those cases generally arise as nuisance claims. Despite its acknowledgement that nuisance claims can be used to regulate pollution, the Ninth Circuit explained that where a statute directly addresses the underlying issue, developing a federal common law was not necessary to address the issue. Accordingly, because the Supreme Court found that Congress acted through the Clean Air Act to address GHG pollution inMassachusetts v. EPA, filling the gap with federal common law (or public nuisance claims) was not necessary. Furthermore, the Ninth Circuit found that federal common law does not fill a gap solely based on the type of relief requested. In other words, the plaintiffs inKivalina sought damages rather than emission reduction, the latter being the type of relief afforded by the Clean Air Act. Although the plaintiffs’ requested relief was not available under the Clean Air Act, the Clean Air Act still displaced federal common law and prevented plaintiffs from seeking damages through a common law claim (such as public nuisance).

Consequently, Kivalina, like Comer, supports the idea that USEPA is charged with regulation of GHGs through the Clean Air Act.

Public Trust Doctrine Cases

Along a similar avenue, a number of public trust doctrine cases have been filed on behalf of children since 2011. In these cases, the plaintiffs allege that children’s futures are being affected by the lack of action to regulate GHGs, and they request that the various agencies cited in the lawsuits — primarily USEPA and Department of the Interior — take immediate action to reduce GHGs. These cases use the public trust doctrine as the basis of the complaint by alleging that the atmosphere is a common resource that must be managed for the public good and the agencies have failed to properly manage that resource. These cases have generally been dismissed for failure to state a claim for which relief can be granted.See Alec L. v. Perciasepe, No. 11-cv-2235 (D.D.C. May 22, 2013); Sanders-Reed v. Martinez, No. D-101-cv-2011-01514 (D.N.M. July 14, 2012); Alec L. v. Jackson, No. 1:11-cv-02235 (D.D.C. May 31, 2012); Loorz v. Jackson (D.D.C. April 2, 2012); Filippone v. Iowa Dep’t of Natural Resources, No. 2-1005, 12-04444 (Iowa Ct. App. Mar. 13, 2013); Aronow v. State, No. A12-0585 (Minn. Ct. App. Oct. 1, 2012).

In general, cases arising under the public trust doctrine face two challenges. First, the Supreme Court held in PPL Montana, LLC v. Montana, No. 10-218 (2012), that the public trust doctrine is a matter of state, not federal, common law and so a federal claim is not justiciable in federal court. Second, in AEP v. Connecticut, No. 10-174 (2011), the Supreme Court held that the role of regulating GHGs, and any consequence(s) of GHGs, has been occupied by the Clean Air Act and therefore challenges to the regulation of GHGs should be brought through the Clean Air Act rather than through a common law claim. Again, these cases are important for the future of GHG regulation because they affirm the agency’s role as the regulator of GHGs through the Clean Air Act.

Montana Envt’l Info. Center v. U.S. Bureau of Land Mgmt., No. cv-11-15-GF-SEH (D. Mont. June 14, 2013).

In another case affirming the role of the Clean Air Act in regulating GHGs, environmental groups claimed that the Bureau of Land Management (BLM) failed to adequately consider climate change, global warming, and the emission of GHGs in violation of the National Environmental Policy Act (NEPA) before approving oil and gas leases on federal land in Montana in 2008 and 2010. The environmental groups argued that BLM’s failure to follow NEPA procedures would result in emissions of methane gas from the oil and gas leases at issue. The release of methane gas would cause global warming and climate change, which would present a threat of harm to their aesthetic and recreational interests in lands near the lease sites by melting glaciers, warming streams, and promoting the destruction of forests through the proliferation of plagues of beetles.

The district court dismissed the lawsuit because the environmental groups lacked standing to bring the claim. The court found that the environmental groups failed to demonstrate that BLM’s alleged failure to follow proper procedure created an increased risk of actual, threatened, or imminent harm to their recreational and aesthetic interests in lands near the lease sites. Although the environmental groups had local recreational and aesthetic interests at heart, the court found that the effects of GHG emissions are diffuse and unpredictable, and the groups presented no scientific evidence or recorded scientific observations to support their assertions that BLM’s leasing decisions would present a threat of climate change impacts on lands near the lease sites. Furthermore, the environmental groups did not show that methane emissions from the lease sites would make a meaningful contribution to global GHG emissions or global warming. The court therefore found that the environmental groups failed to establish injury-in-fact and causation. As a result, the court foreclosed another potential avenue for litigating claims surrounding GHG emissions, and potential plaintiffs now seem to be left only with direct challenges to USEPA’s regulations (or lack thereof).

Conclusion

The Court would mark a dramatic shift if it moved away from these cases. By the time the Supreme Court has the opportunity to review climate change regulation again, the Obama administration may have set a “too big to fail” bar with its climate policies. Regardless of what happens in the future, however, as of today, the Court’s decision in Massachusetts v. EPA appears to have had a pronounced impact, acceding to USEPA the authority to regulate GHGs through the Clean Air Act, and denying common law remedies for impacts tied to climate change.

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Details of Health Insurance Exchanges: Health and Human Services (HHS) Releases Proposed Rule

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On Wednesday, June 19, 2013, the U.S. Department of Health and Human Services (HHS) published a proposed rule that sets forth several new polices related to implementation of the Affordable Care Act’s (ACA) health insurance exchanges (Exchanges) (also known as Health Insurance Marketplaces).

The proposed rule focuses in large part on program integrity with respect to qualified health plans (QHPs) offered through state-run Exchanges and federally-facilitated Exchanges (FFE). The proposed rule also addresses the resolution of certain QHP-related grievances and correction of improperly allocated premium tax credits and cost-sharing reductions, provides states with new flexibility to operate only a Small Business Health Options Program (SHOP) Exchange, and makes certain notable technical corrections. Significant changes proposed by the rule are:

Program Integrity

  • State Exchanges: The proposed rule establishes oversight and financial integrity standards for state exchanges, including reporting and auditing requirements aimed at ensuring that consumers are properly given their choices of available coverage, qualified consumers correctly receive advance payments of the premium tax credit or cost-sharing reductions, and Exchanges otherwise meet the standards of the ACA.
  • FFE: The proposed rule provides details regarding oversight functions of the FFE, including records retention requirements and compliance reviews to be conducted by HHS and proposes the bases and processes for imposing civil monetary penalties in the FFE, as well as for decertifying plans from participation.

Resolution of Grievances

The proposed rule establishes a process for resolving “cases” received by a QHP issuer operating in an FFE (i.e., grievances regarding the operation of the plan, other than advance benefit determinations). While such cases generally must be resolved within 15 days, “cases involving the need for urgent medical care” must be resolved no more than 72 hours after they are received by the QHP, unless a stricter state standard applies. A determination regarding benefit tiers or plan design may fall within HHS’ proposed definition of a “case” for these purposes, so long as it is not a claim denial, which is subject to a different process.

Correcting Improper Allocation of Premium Tax Credits and Cost-Sharing Reductions

The proposed rule specifies the actions a QHP must take if it does not provide the appropriate premium tax credit payments or cost-sharing reductions. The proposed rule prohibits QHPs from recouping excess funds paid on behalf of a consumer or to a provider and requires QHPs to refund any excess payments made by enrollees within certain, specified timeframes.

State Flexibility to Operate Only a SHOP Exchange

The proposed rule allows states to operate only a SHOP exchange, leaving the operation of the Exchange serving the individual and small group markets to the federal government. To implement this change, HHS proposes to allow states that have received conditional approval to operate a state-based Exchange to modify their proposal to offer solely the SHOP Exchange.

States that have not received conditional approval do not have the option of operating only a SHOP in the 2014 plan year. However, for plan years 2015 and beyond, HHS will consider new proposals from states wanting to operate only the SHOP.

Technical Change

  • The proposed rule also amends the applicable definitions of “small employer” and “large employer” for purposes of the Exchanges to those that with an average of at least one, but not more than 100 employees and those with an average of at least 101 employees, respectively.

China to Strictly Regulate Secondment/Staffing Business Model

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Amendments to the PRC Labor Contract Law take effect on July 1, adding limitations on employment structures.

On July 1, 2013, amendments to the People’s Republic of China (PRC) Labor Contract Law will take effect. The amendments increase the regulation of staffing and labor service businesses and discourage the use of secondment arrangements to avoid employer-related liabilities. The new law was published on December 28, 2012 and is an important development in China’s business community.

In recent years, increasing numbers of labor-intensive businesses, including state-owned banks and large multinationals, have used secondment services provided by staffing firms due to the difficulties involved in terminating employees and increased compliance costs in China. The secondment arrangements became attractive options among employers because the termination of such an arrangement was not subject to the numerous restrictions set forth in the labor law and regulations and avoided triggering severance obligations.

In light of the Chinese government’s amendments to the PRC Labor Contract Law, companies with operations in China should keep in the mind the below major requirements when formulating or executing compliance plans.

Qualification of Staffing Firms

To engage in a staffing business for the provision of secondment services, a company must meet the new law’s requirements, which include a minimum registered capital of at least RMB$2 million. In addition, a company must apply for a special permit before conducting any staffing business. As the law is silent on the qualifications of an applicant to obtain such a permit, the approval authorities have broad discretion. It is possible the Chinese government will control the number of service providers in a particular geographic area by limiting the number of permits issued. In practice, firms without permits may structure their business models as outsourcing businesses by arguing that they are not providing staffing services. However, because the distinction between “secondment” and “outsourcing” is not defined in any law or regulation, the regulatory authorities may treat the outsourcing model as secondment in substance and thus require a permit.

Equal Work, Equal Pay

The new law requires that the recipients of secondment services compensate the secondee for his or her services on the principle of “equal work, equal pay.” Although this concept has been in existence since the promulgation of the PRC Labor Law in 1994, it is not a defined term in any labor regulation, including the new law. Traditionally, benefits and other nonsalary items, such as equity incentive awards, have not been considered when applying the principle of equal work, equal pay. It remains to be seen how the courts and labor arbitration organizations will interpret the principle in the context of the new law.

Limitation on the Role of Secondees

The new law expressly states that, as a general principle, employers should hire employees through signed labor contracts and that secondment can be used only if the position is of a temporary, auxiliary, or replaceable nature. A position will be treated as temporary if it lasts no more than six months, but it is not clear whether the secondment term can be renewed upon expiration. “Auxiliary positions” are defined as noncore business positions without further explanation. In practice, it may often be very difficult to distinguish between core and noncore positions. For instance, while it can be argued that only bankers are core to the banking business, it can also be asserted that in-house lawyers should be core personnel as well because of their role in controlling and managing risks, which is critical to banks. The new law defines “replaceable positions” as those left vacant because the formal employees are on leave for personal or business reason, but it is not clear if replacement positions can be renewed.

Percentage Limitation on the Number of Secondees

The new law requires employers to strictly limit the number of secondees to a certain percentage of the total number of personnel (including secondees). Specific percentages will be announced by the State Council. It is generally understood that the percentage should be within a 10% to 30% range. A literal reading of the language of the new law suggests that any percentage limitation should be in addition to the requirement that the positions for secondees should be of a temporary, auxiliary, or replaceable nature. Thus, an employer may not argue that it complies with the law by limiting the number of secondees below the maximum percentage, regardless of the nature of a secondee’s position. In practice, however, employers or regulatory authorities may take the percentage cap as a safe harbor due to the difficulties of defining the nature of a secondee’s position.

Consequences of Breach

For staffing firms without a permit, the Chinese government may take away all illegal revenue and impose monetary penalties of up to five times the amount of the revenue. If a staffing firm or employer fails to comply with the law, the labor regulatory authority will order it to take corrective measures. A per person penalty ranging from RMB$5,000 to RMB$10,000 will be imposed if no remedial measures are adopted by the employer or staffing service provider. The new law is silent on whether a secondee may request that the employer convert him or her into a formal employee if the employer is found to be noncompliant. If the answer is no, what will happen to the existing secondment? Should the parties terminate the secondment and should the actual user of the employee’s service formally employ someone for the same position? May the secondee have a right of first refusal if the actual user is required to do so? These and other similar questions remain to be answered by further implementing rules from the State Council or judicial interpretation from the Supreme People’s Court.

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