Changes in economic conditions, health policy and regulatory requirements will affect the U.S. health industry this year.

As the U.S. health industry adjusts to uncertain economic conditions and anticipated changes in health policy from the new administration, we take a look at the top nine health law issues the industry is likely to face in 2009.


The ongoing credit crisis will make pending and proposed strategic transactions (sale, purchase or restructuring) more difficult to close.  Credit will continue to be tight and borrowing costs will continue to be high.  Lending commitments will come with a steep price and substantial qualifications.  Increased concerns regarding the solvency of both buyers and sellers will lead to heightened and more expensive due diligence examinations.

The credit crisis also will affect capital spending by nonprofit hospitals.  The scarcity of affordable tax-exempt financing will cause many hospital administrators to postpone sorely needed capital improvements and to scale back ongoing capital projects.  In addition, hospital administrators must be cautious and conservative in their capital planning and budgeting to ensure that dire capital needs are met without depleting cash needed for operations.

Changes in the Legislative Landscape

The new Obama administration and the Democratic-controlled Congress have identified systemic health care reform as a top priority.  The appointment of Tom Daschle, a proponent of nationalized health care, as head of the Department of Health and Human Services may well signal the early start of the reform agenda.  Medicare and Medicaid payment reductions, funding for State Children’s Health Insurance Programs (SCHIP), and the use and impact of health information technology will also be at the forefront in 2009.

Governance and Tax-Exemption

If an organization suffers extraordinary investment losses, its board-level finance or investment committee should consider meaningful steps to preserve remaining capital.  This could include board inquiry into the performance of existing investment managers, and whether asset allocation and board and committee procedures should be reformed to avoid additional losses.  Continued risks related to conflicts of interest and need for transparency and disclosure among staff, faculty, board members and executives will continue into 2009. 

The redesigned Form 990 will be effective for 2008 tax returns of exempt organizations that will be filed in 2009.  The form’s major changes focus on summarizing key financial and operating information, disclosing corporate governance practices and explaining executive compensation arrangements.  The form also introduces new Schedule H, specifically designed for hospitals.  Although completion of only one subpart of Schedule H is required for 2008, the entire schedule must be completed for tax years starting in 2009 (returns filed in 2010).  Many hospitals and health care systems are ill equipped to completely and accurately gather the information required to complete the full Schedule H, the completion of which will place an additional burden on hospitals and health systems.

The Internal Revenue Service (IRS) is also expected to release the final Hospital Compliance Project report in 2009.  While the initial report (published in 2007) focused on how hospitals demonstrate their exemption qualifications through community benefit programs, the final report will include additional analysis on the community benefit issue and will describe how hospitals establish executive compensation.  IRS officials and congressional leaders are already suggesting that the final report’s compensation figures may result in re-examination of the rebuttable presumption procedures under the intermediate sanction rules.

Fraud and Abuse

Revisions to the Stark Law, including the expansion of the “DHS entity” definition and prohibition of “per click” leases, may require hospitals to restructure physician joint ventures and contractual arrangements by October 1, 2009.  Given the complexity of the Stark Law regulations, it is easy to fall into a “technical violation” without any real wrongdoing (e.g., failure to get an agreement in writing, even if it is fair market value and otherwise non-abusive).  The analysis of how to address such situations, including whether to self-disclose, is difficult, making review and monitoring of all arrangements with physicians and physician-owned entities of key importance in advance of the implementation date.

Medicare/CMS Activity

The Centers for Medicare and Medicaid Services’ (CMS’s) expanded use of Recovery Audit Contractors (RAC) audits as a means of recouping alleged overpayments from providers will put increasing pressure on already-strained hospitals and health systems, both in terms of potential repayment amounts (and resulting effects on the hospital’s finances) and manpower resources needed to prepare for and respond to a RAC audit.  Providers can prepare for RAC audits by examining the effectiveness of their internal compliance programs.

Pension Funding Concerns

Both for-profit and tax-exempt employers must now maintain nonqualified deferred compensation arrangements pursuant to a written plan document that specifies eligibility to participate in the arrangement, timing and form of payment, and other specific information required by Internal Revenue Code Section 409A.  Deferred compensation arrangements include supplemental retirement plans, severance arrangements, employment contracts with deferral features, certain life insurance arrangements and other arrangements providing for a deferral of compensation.  Organizations that did not revise arrangements to comply with the requirements of Section 409A will need to take corrective action as permitted by the IRS, while those organizations that implement new arrangements or wish to terminate existing arrangements must now do so in accordance with IRS restrictions. 

For-profit and tax-exempt organizations maintaining qualified retirement plans, such as pension plans, profit sharing or 401(k) plans, and 403(b) plans, must continue to comply with applicable legal requirements in 2009, including the requirement that pension plans, profit sharing plans and 401(k) plans be submitted to the IRS for a determination letter every five years.  Plan sponsors with an employer identification number ending in three or eight must submit their determination letter requests to the IRS no later than January 31, 2009, and those with an employer identification number ending in four or nine must submit their determination letter to the IRS no later than January 31, 2010.  Employers that fail to maintain their plans in accordance with applicable law or fail to timely submit them in the applicable determination letter cycle must comply with IRS procedures to correct for such errors. 

In addition, sponsors of defined benefit pension plans must take current market conditions and new funding requirements under the Pension Protection Act into consideration and consider making or revising elections with respect to the actuarial assumptions underlying plan funding to account for the shifts in the market, which may increase funding obligations and significantly affect cash flow.  In certain circumstances, employers may be able to change their elections without the approval of the IRS, but they should verify this before unilaterally taking action.

Medical Group/Hospital Relations, Joint Commission Accreditation

The year 2009 will also welcome the increased movement of physician groups to the hospital enterprise as a “safety net” in a soft economy with an unstable credit market.  Hospitals will favor traditional affiliations with, or employment of, physician groups to enhance their strategic abilities.  Movement toward primary care payment reform and the concept of a “medical home” will further the push for affiliation between hospitals and physician groups to manage costs while focusing on clinical outcomes.

Compliance with The Joint Commission’s new 2009 Standards, which heighten the level of detail and make compliance (and survey activities) more complex, will pose a challenge for hospitals of all sizes.  Hospitals will evaluate alternative routes to deemed status, such as accreditation by the Healthcare Facilities Accreditation Program of the American Osteopathic Association or DNV Healthcare, Inc.’s National Integrated Accreditation for Healthcare Organizations program.

Intellectual Property and Information Technology

In an increasingly competitive marketplace, protecting the value of intellectual property and brand identity is important.  Auditing intellectual property and branding can help determine the value of these assets.

The rapid and exponential increase in electronically stored information (ESI) has increased the possibility that sensitive and proprietary data may be compromised, in violation of a particular law or regulation, or at the expense of a hospital, health system, or its patients and employees.  Health care providers operate in an environment where the storage and retention of data, including ESI, is highly regulated and varies by jurisdiction, and where missteps can be costly.  In addition, security breaches can result in a public relations crisis.

Continuing Issues with Clinical Trials, Establishing Patient Safety Organizations

Hospitals and health systems will continue the race to build infrastructure in order to participate in clinical trials, have access to “cutting edge” medicine and build their reputations based on affiliations with research universities.  There is continuing danger in the areas of conflicts of interest, public scrutiny and risks to patients caused by an ill-run clinical research program.

Final rules related to the Patient Safety Act of 2005 provides a framework by which hospitals, physicians and other providers report certain types of information to a patient safety organization, which data are then aggregated and analyzed with respect to patient safety events.  All reports and the resulting data are privileged and confidential.