An update on the latest legislative and regulatory developments affecting the health care industry

Regulatory News

On Nov. 1, 2007, the Centers for Medicare & Medicaid Services (“CMS”) released its final Medicare physician fee schedule rule for calendar year (“CY”) 2008. The rule calls for a 10.1 percent across-the-board cut in physician payments because of the statutory update formula, although Congress is expected to take action to avert or mitigate the cuts later this year. The rule also includes a number of major revisions to the independent diagnostic testing facility performance standards and purchased diagnostic test rule that have the potential to significantly impact certain types of physician-owned imaging ventures (a Reed Smith memorandum analyzing these provisions is available on our website). This sweeping rule also features other important policy provisions, including among many other things: implementation of the Physician Assistance and Quality Initiative Fund (which will provide $1.35 billion for physician payment and quality improvement initiatives for services furnished in 2008); updated personnel qualifications for persons furnishing physical and occupational therapy services; and revisions to the public consultation procedures for new clinical diagnostic laboratory test payment.

Also on Nov. 1, CMS released its final Medicare hospital outpatient prospective payment system (“OPPS”) rule for CY 2008. CMS estimates that the rule will provide a 3.8 percent average increase in Medicare payments for outpatient services. In addition to updating payment amounts, the final rule institutes a number of policy changes, including the following:

  • Packaging – CMS is expanding the current “packaging” policy to bundle payment for seven categories of supportive ancillary services into the primary diagnostic and treatment procedures with which they are performed.
  • Composite APCs – CMS has adopted “composite ambulatory payment classifications” (“APCs”), through which a single payment will be made for multiple major procedures performed in a single hospital encounter. 
  • Quality Reporting – The rule requires hospitals that are paid under the Medicare inpatient prospective payment system (“IPPS”) to report on seven outpatient quality measures for services furnished in the hospital outpatient department in 2008 in order to receive the full OPPS market basket update in CY 2009; otherwise, the update will be reduced by 2 percentage points.
  • Payment for Drugs – The rule provides separate payment for drugs, biologicals, and therapeutic radiopharmaceuticals costing more than $60 or more per day (up from $55 in 2007); generally sets payment for nonpass-through separately payable drugs and biologicals at ASP plus 5 percent (instead of the current ASP plus 6 percent); and reimburses drugs and biologicals with passthrough status at ASP plus 6 percent.
  • Replacement Devices – The rule reduces payment for certain devicedependent APCs when a hospital receives a partial credit from the manufacturer toward the cost of a replacement device implanted in a procedure.
  • Graduate Medical Education (“GME”) – The rule extends the effective period for emergency Medicare GME affiliations from three academic years to up to five academic years in general (with certain limitations for out-of-state emergency affiliations), and adopts other revisions to GME policy.
  • Ambulatory Surgical Center (“ASC”) Policy – The final rule also updates relative payment weights and amounts for services furnished in ASCs, specific codes to which the final policies of the ASC payment system apply, and other pertinent rate setting information for the revised ASC payment system for 2008.

On Sept. 5, 2007, CMS published its major “Stark III” Medicare physician self-referral final rule. While the new rule does not establish new exceptions to the self-referral prohibition, CMS asserts that the rule reduces the regulatory burden on the health care industry through its refined interpretation of the current exceptions, which will permit (and in some cases will require) restructuring of existing arrangements. The rule is effective Dec. 4, 2007. A Reed Smith client memorandum summarizing the rule is available on our website. Note that on Nov. 15, CMS published a notice delaying for one year certain limited provisions of the rule.

On Oct. 5, 2007, the Office of Inspector General of the Department of Health and Human Services issued a final rule establishing a safe harbor under the anti-kickback statute to protect certain arrangements involving remuneration in the form of goods, items, services, donations, or loans furnished by a provider or supplier to certain federally qualified health centers. The rule is effective Dec. 3, 2007.

Other recent regulations include the following:

  • A CMS proposed rule narrowing the definition of Medicaid outpatient hospital services to modify how upper payment limits are applied, provide more transparency in determining available coverage in any state, and clarify the services for which federal financial participation is available (Sept. 28)
  • A CMS notice regarding proposed hospital reporting requirements regarding investment, ownership, and compensation arrangements between physicians and hospitals (Sept. 14)
  • A CMS proposed rule amending the Medicare conditions for coverage for ambulatory surgical centers (Aug. 31)
  • The final 2008 Medicare home health prospective payment system rule (Aug. 29)
  • An interim final rule with comment period establishing new Medicare conditions of participation requirements for hospitals that transfuse blood and blood components (Aug. 24)

Legislative News

On Sept. 27, 2007, President Bush signed into law H.R. 3580, the Food and Drug Administration (“FDA”) Amendments Act of 2007 (“FDAAA”). This is the most significant revision of FDA’s safety authority since 1962, particularly in the area of post-approval surveillance of safety information. The new law permits FDA to require (1) post approval studies and clinical trials; (2) risk evaluation and mitigation strategies for certain products; and (3) pre-review of direct-to-consumer (“DTC”) advertisements. FDAAA also authorizes FDA to level considerable civil money penalties against manufacturers that violate the DTC and drug safety provisions. Reed Smith has prepared an analysis of the new law, which is available on our website.

There has been a great deal of attention in Washington regarding reauthorization of the State Children’s Health Insurance Program (“SCHIP”). On Oct. 18, 2007, the House of Representatives failed to override President Bush’s veto of H.R. 976, a $35 billion package that would have reauthorized and expanded SCHIP. The House and Senate subsequently approved another version of legislation (H.R. 3963), again with insufficient support to override an expected veto.

In addition, on Sept. 29, 2007, President Bush signed into law H.R. 3668, which extends the Transitional Medical Assistance, Abstinence Education, and Qualifying Individuals programs, and modifies certain Medicare and Medicaid programs. Among other things, the legislation cuts in half the “behavioral offset” reduction included in the final FY 2008 Medicare hospital inpatient prospective payment system rule; provides additional funding for the Medicare physician assistance and quality initiative fund; and delays for six months (until April 1, 2008) the requirement for Medicaid programs to use tamper-resistant prescription pads.