OIG Issues Favorable Advisory Opinion 14-05 Regarding A Pharmaceutical Manufacturer’s Direct-To-Patient Product Sales Program

The U.S. Department of Health and Human Services, Office of Inspector General (the “OIG’), on July 21, 2014, issued a favorable advisory opinion regarding a pharmaceutical manufacturer’s (the “Manufacturer”) direct-to-patient product sales program, which allows eligible patients to purchase one of the Manufacturer’s brand name products for a fixed price from an online retail pharmacy vendor outside of any applicable prescription drug insurance benefit (the “Arrangement”).  The OIG decided not to impose administrative sanctions on the Manufacturer pursuant to the civil monetary prohibition on offering inducements to beneficiaries or the Anti-Kickback Statute in connection with the Arrangement.  Although Advisory Opinion 14-05 is limited to only the specific Arrangement of this particular Manufacturer, it is a promising decision for patients in desperate need of discounted brand name products and other pharmaceutical manufacturers with aspirations to establish similar arrangements.

Pursuant to the Arrangement, the Manufacturer sells a brand name product, which is eligible under Medicare Part D, but not included on most third party payer formularies or otherwise placed on non-preferred formulary tiers due to the availability of generic equivalents.  The participants enroll by phone, internet, or mail and purchase the product directly from an online retail pharmacy vendor, who contracted to be the Manufacturer’s dispensing agent.  The Arrangement operates completely outside of all federal health care programs.

The OIG addressed several issues regarding the Arrangement, including:  (1) whether the discount provided under the Arrangement is likely to induce the participants to select the online pharmacy to supply items, for which payment may be made by Medicare, Medicaid, or a State health care program; and (2) whether the Arrangement implicated the Anti-Kickback Statute by providing remuneration to the participants or the online pharmacy.  When deciding whether the Arrangement induced participants in violation of the civil monetary prohibition, the OIG concluded that the availability of a discount was not likely to influence the participants to select the online pharmacy to supply other products, which may be payable under Medicare or Medicaid.  Moreover, the OIG similarly concluded that there was a sufficiently low risk that the Arrangement violated the Anti-Kickback Statute.

Advisory Opinion 14-05 is encouraging for other pharmaceutical manufacturers with ambitions of establishing similar arrangements and patients in need of discounts on brand name products.  However, the OIG acknowledged that its decision might be different if the product has no generic equivalents, is covered by more plan formularies, or is more generously covered by some plan formularies.  The
full text of Advisory Opinion 14-05 can be found here.

“Audit And Extrapolate” – The Unofficial Motto of the Office of the Inspector General

Recently the Office of Inspector General (“OIG”) issued a report on a compliance review conducted at the University of Cincinnati Medical Center (“UCMC”) for the years of 2010 and 2011. As a result of the audit, the OIG is seeking repayment of $9.8 million in alleged overpayments. The audit is the most recent example of the government’s use of the lawful, yet controversial, process of extrapolation.

UCMC is a 695 bed acute care teaching hospital with approximately $256 million in Medicare payments for 2010 and 2011 combined. The OIG’s audit targeted 2,742 claims identified by the OIG as high risk for possible billing errors accounting for $22.8 million of UCMC’s reimbursement for the two years. However, rather than review all of these possibly problematic claims, the OIG reviewed only a subset of 228 claims accounting for $3.2 million. The OIG found UCMC failed to comply with Medicare billing requirements for 127 of the claims amounting to an overpayment of $603,276. The OIG extrapolated this error rate over the entire amount in question to arrive at a repayment figure of $9.8 million.

The errors identified in the inpatient claims included:

  • Services incorrectly billed as inpatient;
  • Incorrectly billed DRG codes;
  • Credits not obtained;
  • Incorrect discharge status;
  • Incorrect source of admissions; and
  • Incorrect outlier payments

The errors identified in the outpatient claims included:

  • Insufficient documentation
  • Credits not reported
  • Incorrect E/M services
  • Incorrect HCPCS
  • Incorrect number of units

The OIG concluded its report by emphasizing its legal right to use statistical sampling and extrapolation. It also reiterated UCMC’s right to appeal individual determinations if it disagrees with the total amount owed.

UCMC, in response to the audit, identified several concerns it felt undercut the validity, accuracy and fairness of the OIG’s audit. UCMC highlighted the fact that the OIG did not allege any services were medically unnecessary or not rendered. Rather, the OIG raised Medicare billing requirement technicalities having nothing to do with the quality or appropriateness of care. UCMC also took issue with the fact that the OIG specifically identified claims believed to include overpayments while excluding any that might have resulted in underpayments. Thus, according to UCMC, an accurate determination of any under- or overpayment could not be determined based on the OIG’s audit work. Finally, UCMC took issue with the small sample sizes of claims for each of the potential overpayment issues being investigated claiming they did not constitute a sufficient statistical sample for such an audit and extrapolation. The OIG disagreed with UCMC’s position.

It is anticipated that UCMC will appeal the results of the audit. However, every indication suggests that the OIG will continue to implement these audit tactics and utilize extrapolation as a means of making up for its shortage in resources. The American Hospital Association recently also entered the debate. It penned a letter to Secretary Sebelius of the United States Department of Health and Human Services on June 2, 2014 expressing its concerns with this and other OIG audits of hospitals for the calendar years 2010 and 2011.

Hospitals must remain vigilant and proactive in their compliance efforts as these audits appear to be only increasing in frequency.

Proposed OIG Regulations Seek to Expand “Kiss of Death”

On May 9, 2014, the Office of Inspector General (“OIG”) of the Department of Health and Human Services (“HHS”) published in the Federal Register (79 Fed. Reg. 26810-26828 (May 9, 2014)) a set of proposed rule amendments to the regulations relating to the OIG’s exclusion authority. The amendments would expand the OIG’s exclusion authority, also known in the industry as the “kiss of death” due to the fact that a provider’s exclusion from federal programs such as Medicare and Medicaid can often spell doom since these programs are often vital revenue sources for providers.

Presently, if a provider is found to have engaged in any of four grounds for mandatory exclusion, the OIG is required to exclude a provider from federal health care program participation. 42 U.S.C. § 1320a-7(a). Mandatory exclusions last a minimum of five years and apply to convictions of the following types of criminal offenses:

  1. Medicare or Medicaid fraud, in addition to any other offenses related to the delivery of items or services pursuant to Medicare, Medicaid, SCHIP or other state health care programs;
  2. Patient abuse or neglect in connection with the delivery of a health care item or service;
  3. Felony convictions, under federal or state law, in connection with the delivery of a health care item or service, for other health care related fraud, theft, or other financial misconduct; and
  4. Felony convictions relating to controlled substances and their unlawful manufacturing, distribution, prescription or dispensing.

There are also 16 different permissive exclusion categories which give the OIG discretion to exclude a provider from participation in any federal health care program. 42 U.S.C. § 1320a-7(b). Permissive exclusions fall into two categories: (1) “derivative” exclusions that are based on actions previously taken by a court or other law enforcement or regulatory agency; and (2) “affirmative” exclusions that are based on OIG-initiated determinations of misconduct. Permissive exclusions include such events as revocation or suspension of the provider’s license, claims for excessive charges or medically unnecessary services, improper kickbacks, controlling a sanctioned entity as an owner, officer or managing employee, and convictions for health care related misdemeanor crimes. While there is no five-year minimum term for permissive exclusions, some categories of permissive exclusions have varying minimum or benchmark exclusion terms.

The OIG’s proposed rule amendment would expand the permissive exclusions to include the following additional circumstances as identified in the Affordable Care Act §§6402(d), 6406(c) and 6408(c):

  1. Conviction of an offense in connection with the obstruction of an audit;
  2. Furnishing, ordering, referring for furnishing or certifying the need for items or services for which payment may be made and then failing to supply the requisite payment information;
  3. Knowingly making, or causing to be made, any false statement, omission or misrepresentation of a material fact in any application, agreement, bid, or contract to participate or enroll as a provider of services or as a supplier under a Federal health care program.

These additional exclusionary circumstances put greater pressure on providers especially with regard to audits. This push to encourage a higher level of cooperation with governmental audits is not surprising given that the OIG, the Department of Justice and various other federal and state agencies continue to expand their audit efforts to uncover waste, fraud and abuse in the system. Providers will therefore only face greater pressure to cooperate fully with all governmental audits now that there is the added threat of exclusion from federal health care programs. Most providers cannot take such a risk and thus are left in the difficult position of deciding when to push back against governmental audits that can easily become burdensome and costly, especially when the agency has targeted a particular individual or entity.

Be Prepared for the New ICD-10 Reimbursement Coding Standard

On October 1, 2014 the reimbursement process for the United States health care system will become significantly more complicated. On this date, a new system for recording injuries, medical diagnoses, and inpatient procedures will go into effect. It is known as ICD-10, the 10th version of the International Classification of Diseases created by the World Health Organization.

Of particular concern to the industry is the explosion of the number of codes from 17,000 under the current system to approximately 155,000 under ICD-10. As a consequence, the pressure and stress on already strained health care professionals and their staffs to properly code a particular service will only increase. This means the new system must be implemented and learned by the deadline or providers risk losing reimbursement due to coding errors. And, with the explosion of new codes, many in the health care industry fear there will be a significant learning curve when diagnoses in ICD-10 have exploded to include every conceivable iteration of an injury or disease. For example, in ICD-9 there were nine codes for bites while under ICD-10 there are over 300. Proponents of the new standard argue that there is a systematic approach and hierarchy to the coding which makes it easy to navigate. They also argue that such a system is beneficial because it provides a greater level of detail for predictive analytics, which every business can utilize to better assess its services and improve quality and performance. Many in the industry appear skeptical that this will be the case. Regardless, the health care system will have to become familiar with the following, which are only a sampling of the entertaining and frankly absurd examples of coding specificity in ICD-10:

  • V9733XA – sucked into jet engine, initial encounter;
  • V80731A – occupant of animal-drawn vehicle injured in collision with streetcar, initial encounter;
  • V9027XA – drowning and submersion due to falling or jumping from burning water-skis, initial encounter;
  • T71232A – asphyxiation due to being trapped in a (discarded) refrigerator, intentional self-harm, initial encounter; and
  • T63813A – toxic effect of contact with venomous frog, assault, initial encounter.

Aside from the complexity of the new system, what is also alarming is the fact that until recently, despite the numerous setbacks and embarrassments from implementation of the Affordable Care Act and HealthCare,gov, the Center for Medicare and Medicaid Services (CMS) had no plans to conduct end-to-end testing of the system before the October launch date. A February 18, 2014 letter from four Republican senators to the CMS administrator, which urged testing, finally resulted in CMS announcing it would offer limited end-to-end testing sometime in the summer of 2014 with details to be disseminated at a later time. It remains to be seen if the testing will actually occur or how robust it will be to prepare the system for this major change.

While the deadline for implementation has already been delayed twice, CMS has issued stern warnings to the industry that the current October 1, 2014 deadline is a firm deadline. As a result, the health care system is trying to figure out how to go about implementing and preparing for the changes. As of 2008, a study by the health care IT firm Nachimson Advisors warned that estimated total costs for implementation would be $83,290 for a small practice (3 physicians and 2 administrative staffers), $285,195 for a medium practice (10 providers, 1 professional coder, and 6 administrative staffers), and $2.7 million for a large practice (100 providers, 10 full-time coding staffers, and 54 medical records staffers).

The American Medical Association, an opponent of the ICD-10 implementation, has a significant amount of literature on its website regarding challenges to the adoption of the standard as well as recommended action for providers to prepare for the October 1, 2014 deadline. The materials can be found here.

Department of Justice Reaches $15.5 million Settlement With Diagnostic Testing Facility for Alleged False Claims and Illegal Kickbacks

On February 25, 2014 the Department of Justice (DOJ) issued a press release  announcing a false claims settlement with Diagnostic Imagine Group (DIG).  Operating a chain of diagnostic testing facilities through its subsidiary, Doshi Diagnostic Imaging Services,  DIG agreed to pay a total of $15.5 million to resolve allegations that it had falsely billed federal and state health care programs for tests not performed or not medically necessary. The company, which is headquartered in Hicksville New York, was also alleged to have paid improper kickbacks to physicians for referrals.  The settlement was coordinated with the office of New York Attorney General Eric Schneiderman.  DIG will pay $2.9 million of the total settlement for the resolution of New York claims with $190,384 being repaid to the New Jersey Medicaid program.

DIG was facing allegations that it submitted claims to Medicare and the New York and New Jersey Medicaid programs for 3D reconstruction of CT scans that were never performed or interpreted along with allegedly bundling certain tests on its order forms so that physicians could not order other tests without ordering additional bundled tests, which were not medically necessary. Additionally, the settlement resolved allegations of kickbacks to physicians in the form of payments to ostensibly supervise patients who underwent nuclear stress testing, which allegedly exceeded fair market value and were effectively intended to reward physicians for referrals.

The settlement resolves three qui tam, or whistleblower, lawsuits that had been filed pursuant to the provisions of the False Claims Act. The qui tam plaintiffs will receive $1.5 million, $1.07 million and $209,250 respectively from the settlement proceeds for their involvement.  Two of the relators were physicians, including one who had served as an Assistant Medical Director for DIG.

This settlement illustrates the push by the Health Care Fraud Prevention and Enforcement Action Team (HEAT) initiative, which was announced in May 2009 by Attorney General Eric Holder and Secretary of Health and Human Services (HHS) Kathleen Sebelius to help focus efforts to reduce and prevent Medicare and Medicaid fraud. In FY 2013 alone the government reported recovery of $4.3 billion in health care fraud, which was up $100 million from FY 2012. This brings the grand total recovery over the past five years to $19.2 billion. According to HHS, for every dollar spent on health care-related fraud and abuse investigations through this and other programs in the last three years, the government recovered $8.10.

Comments by Attorney General Eric Holder evidence that the government will only be reinforcing and strengthening its efforts to continue to root out fraud. “With these extraordinary recoveries, and the record-high rate of return on investment we’ve achieved on our comprehensive health care fraud enforcement efforts, we’re sending a strong message to those who would take advantage of their fellow citizens, target vulnerable populations and commit fraud on federal health care programs. Thanks to initiatives like HEAT, our work to combat fraud has never been more cooperative or more effective.” Providers should anticipate enforcement and investigation efforts to only increase in the future.

Copies of the DOJ, HHS and the NY AG press releases can be found at:

New Employee Notification Requirements for New Jersey Employers Regarding Gender Inequality and Bias

Effective January 6, 2014, all New Jersey employers with at least 50 employees (whether working within or outside of New Jersey) must begin complying with the State’s new gender equity notice requirements.  The purpose of the notice is to notify employees of their rights to be free from gender inequality or bias under the New Jersey Law Against Discrimination, Title VII of the Civil Rights Act of 1964 and the Equal Pay Act of 1963.  Employers who reasonably believe that Spanish is the first language of a significant number of its workforce also will be required to post and distribute the notice in Spanish.

New Jersey employers with at least 50 employees must do the following:

  •  Beginning January 6, 2014, conspicuously post the notice in place(s) accessible to all employees in each workplace.
  • No later than February 5, 2014, provide all employees hired on or before January 6, 2014 with a written copy of the notice, along with a form acknowledgment that the employee has received, read and understands the notice.
  • Provide each employee hired after January 6, 2014 with a written copy of the notice at the time of the employee’s hiring, along with a form acknowledgment that the employee has received, read and understands the notice.
  • Beginning January 6, 2014, annually provide each employee with a written copy of the notice on or before December 31 of each year, along with a form acknowledgment that the employee has received, read and understands the notice.
  • Beginning January 6, 2014, provide each employee with a written copy of the notice upon that employee’s first request, along with a form acknowledgment that the employee has received, read and understands the notice.

Employers with an internet or intranet site for exclusive use by its employees, and to which all employees have access, may satisfy the January 6th posting requirement by posting the notice on that site.

Employers may satisfy the “written copy” requirements by any of the following methods:  (a) e-mail delivery; (b) delivering a printed copy; or (c) through an internet or intranet site for exclusive use by its employees, and to which all employees have access, if the employer provides notice to all employees of the posting.

The notice is available for download from the New Jersey Department of Labor and Workforce Development’s website at the following link:  Click Here

Provider Rights to Primary Care Enhanced Payments Under the ACA in Question

Section 1202 of the Healthcare Education and Reconciliation Act of 2010 amended the Affordable Care Act to mandate an increase in Medicaid primary care service payment rates for 2013 and 2014. These enhanced payments were intended to lure more providers into primary care, thereby increasing access to such services for Medicaid beneficiaries.

Despite no clear directive in the statute or implementing regulations, some Medicaid managed care organizations (MCO) have taken the position that the enhanced payments must be paid directly to the rendering provider, be it a physician, nurse practitioner, physician’s assistant or the like. Some MCOs have even requested that providers sign attestations “certifying” that the payments will be allocated in this manner.

This has created confusion for group providers who employ physicians that have signed employment agreements requiring all revenue derived from professional activities be assigned to the group. CMS has provided no official position, except to reiterate that the intent of the statute is to insure that the enhanced payment does not stay with the state Medicaid agency or the MCO.

In response to a comment submitted about a salaried physician working for a county provider, CMS indicated that “the physician must receive the increased payment” but that “[i]f, as a condition of employment, the physician agrees to accept a fixed salary amount then we expect an appropriate adjustment to the salary to reflect the increase in payment.” This, however, fails to address the most common circumstance where the physician has assigned all fees to the provider pursuant to an employment agreement.

Group providers should be sensitive to the potential exposure these enhanced payments could create given the lack of a clear directive either in the law or by the federal and state agencies.


Welcome to the new MDM&C Health Care Law Blog! Through this medium we hope to deliver valuable information relevant to health care providers whether you are a solo practitioner or a health care system.