Welcome to this week's edition of the Health Law Update. In this Issue:

  • The Proposed Medicaid DSH Rule: Hospitals, States and Associations Declare It Legally Insufficient
  • Summer Fraud and Abuse Roundup
  • Dialing for Dollars Yields Conviction for Home Health Telemarketer
  • Visit Our Blog for the Latest Healthcare Updates From Capitol Hill
  • Susan Feigin Harris Named "Lawyer of the Year" in 2017 Best Lawyers in America List
  • Events Calendar

The Proposed Medicaid DSH Rule: Hospitals, States and Associations Declare It Legally Insufficient

The Centers for Medicare and Medicaid Services (CMS) recently released a proposed rule addressing the treatment of third-party payments when calculating uncompensated care costs for the Medicaid disproportionate share hospital (DSH) formula (Proposed Rule). While CMS maintains the Proposed Rule merely clarifies longstanding policy, industry stakeholders submitting comments prior to the September 14 deadline disagree, saying it would substantively modify the Medicaid DSH formula methodology. The new CMS policy is also the subject of litigation in two federal district courts – New Hampshire and the District of Columbia.

The issue raised by the plaintiffs in both cases involves the 2010 publication of answers to two Frequently Asked Questions (FAQs), #33 and #34. FAQ #33 involves commercial third-party payments. It defines Medicaid-eligible patients with private commercial insurance coverage as "dual eligible," and requires the inclusion of private third-party payments in the calculation of the hospital-specific limit, when there is no Medicaid claim or payment made on behalf of a Medicaid-eligible patient. FAQ #34 addresses dual-eligible patients and the inclusion of Medicare payments in this same manner. During the DSH audits and the finalization of these audits, CMS has required that any amounts paid during the 2011 cost reporting year be recouped in the 2014 audit. The agency has also threatened to deny federal financial participation to states that fail to enforce the FAQs.

The policy change was first identified by children's hospitals in Texas and Washington when the entirety of their DSH payments was eliminated, or when they were completely shut out of their state's DSH program. Medicaid covers children who are significantly premature or whose length of stay is extensive or illness is particularly severe, regardless of insurance status. When private coverage is present, the impacted hospitals do not bill or collect for their care, even though they are technically categorized as Medicaid-eligible. The DSH formula approach identified first in FAQ #33 would include payments made by the commercial insurers at the rate negotiated in the contract with the hospital and not at a rate that Medicaid would have paid, had Medicaid actually paid the claim. The inclusion of these revenues in calculating the Medicaid shortfall part of the uncompensated care formula has a significant adverse impact on these hospitals.

The plaintiffs assert that the policies advanced by CMS conflict with the unambiguous language of the governing statute, 42 U.S.C. § 1396r-4(g)(1)(A), are being implemented without appropriate notice and comment, and are therefore illegal and void under the Administrative Procedures Act. The District of Columbia and New Hampshire district courts agreed and have temporarily enjoined CMS from “enforcing, applying, or implementing” the policies. Commenters to the Proposed Rule, including the American Hospital Association, the Children's Hospital Association and several state hospital associations, have all expressed indignation at CMS’s apparent attempt to circumvent the determinations of two federal district courts.

Both lawsuits await final determination, with all permanent injunction arguments having been completed. The courts will determine the final application of the Proposed Rule on two issues: (1) whether CMS inappropriately applied the FAQs without first complying with the proper notice and comment required for issuing a substantive rule under the Administrative Procedures Act, and (2) whether the policy would be upheld as authorized under the applicable statute.

Summer Fraud and Abuse Roundup

Now that the kids are back in school and summer vacations are in the rearview mirror, it’s time to catch up on recent fraud and abuse developments. The federal government was busy this summer negotiating a pair of settlements under the Stark Law and anti-kickback statute, drafting changes to the Self-Referral Disclosure Protocol (SRDP), and issuing an interim final rule incorporating statutory increases to civil money penalties. This article highlights those recent developments.

Summer Fraud and Abuse Settlements

Lexington Medical Center

On July 20, 2016, Lexington Medical Center (LMC) in South Carolina agreed to pay $17 million and enter into a corporate integrity agreement with the U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG) to settle allegations that its financial relationships with 28 physicians violated the Stark Law and the False Claims Act. LMC is a public hospital district with over 300 employed physicians. The plaintiff, a former LMC neurologist, alleged that LMC acquired physician practices to capture the physicians’ referrals, and in exchange, LMC paid them commercially unreasonable compensation exceeding fair market value. For example, the plaintiff stated his compensation was $250,000 before the acquisition and topped out at $650,000 during his second year of employment by LMC. The plaintiff also reported that LMC held meetings with the employed physicians to discuss declining imaging referrals and terminated him in July 2013 because he refused to send all imaging referrals to LMC. The second amended complaint alleges that LMC’s arrangements with the plaintiff and other physicians violated the Stark Law because the acquisition and employment agreements provided compensation to the physicians in excess of fair market value, took into account the volume or value of referrals, and were not commercially reasonable.

The settlement involved similar allegations related to LMC’s acquisition of four other physician groups. The $17 million paid by LMC pales in comparison to recent Stark Law cases involving employed physician relationships which have reached into the hundreds of millions of dollars. Nevertheless, the case is yet another example of the False Claims Act implications of problematic physician relationships.

Sweet Dreams Nurse Anesthesia

On August 5, 2016, Sweet Dreams Nurse Anesthesia (Sweet Dreams) agreed to pay more than $1 million to resolve allegations that it violated the False Claims Act by engaging in several arrangements implicating the federal anti-kickback statute. Sweet Dreams is a partnership of certified registered nurse anesthetists. The settlement addressed several schemes implicating the federal anti-kickback statute, including allegations that Sweet Dreams provided free anesthesia drugs to ambulatory surgery centers (ASCs) in exchange for an exclusive contract as the provider of professional anesthesia services at those ASCs. An affiliate of Sweet Dreams was also alleged to have funded the construction of an ASC in exchange for Sweet Dreams being awarded the exclusive anesthesia contract at the facility and a number of other affiliated ASCs.

The settlement stemmed from a qui tam case filed by a former employee. Notably, the initial False Claims Act complaint did not involve kickback allegations but focused on billing compliance issues. The government may have uncovered the alleged kickback violations through its investigation of the billing compliance issues. The settlement underscores the importance of fraud and abuse compliance considerations in exclusive arrangements for professional services.

Proposed Updates to the Self-Referral Disclosure Protocol

The Centers for Medicare and Medicaid Services (CMS) recently issued a notice in the Federal Register seeking public comments on updates to the Self-Referral Disclosure Protocol (SRDP) information collection requirements. Under the current SRDP, a party must provide a financial analysis of overpayments arising from actual or potential violations based on a four-year lookback period. CMS is proposing to revise the SRDP to reflect the six-year lookback period established by the final overpayment rule on February 12, 2016. The six-year lookback period would apply only to submissions to the SRDP received on or after March 14, 2016, the effective date of the final overpayment rule.

Additionally, on September 9, 2016, CMS introduced a new mandatory form for SRDP submissions, aiming to streamline and simplify the SRDP process. CMS Form Number CMS-10328 solicits all of the required information for an SRDP submission, but providers are still permitted to include a cover letter with additional information.

Comments on the changes to the SRDP must be received by October 11, 2016.

Inflated Penalties

The Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (Act) requires federal agencies to make cost-of-living adjustments to civil monetary penalty (CMP) amounts based on increases in the Consumer Price Index (CPI). On September 6, 2016, the U.S. Department of Health and Human Services (HHS) issued its interim final rule (IFR) updating the CMP regulations for all agencies within HHS. Under the Act, agencies are required to make a “catch-up” adjustment to CMPs that they implement, which is the difference between the CPI of the calendar year in which the penalties were last adjusted and the CPI for the current year. The catch-up adjustments are capped at 150 percent of the current penalty amount. The IFR sets forth the initial catch-up adjustment for CMPs under the control of HHS as well as any necessary technical conforming changes to the language of these regulations. Going forward, the CMP amounts will be adjusted without notice and comment rulemaking each January based on changes in the CPI.

All CMPs under 42 U.S.C. 1320a-7a(a) were increased, including a 47 percent increase to the amount of the CMPs applicable to kickback arrangements (now $73,588) and for employing or contracting with excluded individuals (now $14,718). Further, the CMP for Stark Law violations increased 59 percent, from $15,000 to $23,863. The adjusted civil penalty amounts are applicable only to civil penalties assessed after August 1, 2016, for violations occurring after November 2, 2015.

Dialing for Dollars Yields Conviction for Home Health Telemarketer

Sundae Williams, the owner of Serenity Marketing Inc., made unsolicited phone calls to recruit patients, including Medicare beneficiaries, for contracted home health agencies. Williams and Serenity then referred those patients to the home health agencies in exchange for payments on a per-patient basis. Williams was convicted on one count of conspiracy and six counts of soliciting and receiving remuneration in return for the referral of Medicare patients. Williams was the fourth person to be convicted as part of a larger federal investigation into Serenity and the home health agencies. The others have pleaded guilty to a variety of Medicare fraud charges, including billing for unnecessary services, paying kickbacks and falsely certifying patients for nursing services.

The convictions highlight the risks involved with these types of marketing arrangements that are becoming more common, especially if the compensation is not properly structured. In this case, Serenity “employees were trained to cold-call Medicare beneficiaries and convince them to accept home health services.” If a Medicare beneficiary expressed interest, Serenity employees obtained the beneficiary’s personal information, including their Medicare number, and provided it to the home health agencies that had agreed to pay Serenity for the referrals. This is similar to other cases we have seen in which a contractor, in many cases offshore, is engaged to call potential home health and durable medical equipment clients from a boiler-room operation and qualify them for the provider. A second enterprise related to the cold-caller, or in some cases, the provider itself, then calls qualified leads and attempts to sell them on their services.