What does “assuming financial risk” mean for a health care provider?

by Neil M. Sullivan

Historically, health care providers haven’t had to worry about the laws and regulations that apply to risk-assuming entities like insurance companies.   That is changing as more health systems and the carriers they work with look more seriously to risk-shifting arrangements to incentivize cost-effectiveness and share in the gains and losses.  Health systems that ignore these requirements do so at their own risk.

In New Jersey, N.J.A.C. 11:24-15.1 provides that:  

(a):  No person shall assume financial risk, in whole or in part, for the cost or provision of, or arrangements for, one or more health services to others unless the person is…An authorized payor as defined at  N.J.A.C. 11:24-1.2;.. A provider actually performing the health services (including providing supplies) within the scope of his or her license; or …An employer with respect to its own employees, and dependents of those employees.

At a broad level, any person (natural or corporate) who undertakes to provide a service that may cost more than the amount they’ve agreed to accept for it may be considered to have assumed financial risk.  So let’s start with the exceptions in the regulation:

  • An authorized payor or other entity properly licensed to assume risk.  This is discussed in greater detail below.
  • A provider actually performing the health services (including providing supplies) within the scope of his or her license.  This would apply, for example, to a doctor being paid on a capitation basis to care for patients in his or her panel.  While a panel of unusually high utilizers may cause the arrangement to be unprofitable, limiting the services to those provided by the doctor under his or her license keeps the arrangement within this exception to the prohibition.  For the same reason, a facility agreeing to be paid on a per diem or Diagnosis Related Group basis is not in violation of this prohibition, as long as the facility is performing the services and they are within the scope of its licensure.   
  • An employer with respect to its own employees, and dependents of those employees. 

What is Financial Risk?

Financial risk is defined in the regulation on Organized Delivery Systems (“ODS”) (N.J.A.C. 11:22-4.2) in part as follows:

“Financial risk” means exposure to financial loss … for the payment of claims or other losses arising from covered benefits for treatment or health care services other than those performed directly by the person or organized delivery system liable for payment, including a loss sharing arrangement. …. A financial risk shall exist if, under an agreement between the organized delivery system and the carrier, the financial obligations of the organized delivery system for payment of benefits or for providing treatment or health care services does or potentially may exceed any payments that may be received from the carrier…

The analysis is therefore focused on whether the arrangement with a carrier opens the system or provider up to the possibility that it may have to cover costs beyond those provided by it under its own license.  The following is an example adapted from examples on the website of the New Jersey Department of Banking and Insurance, but limited to the issue of assumption of financial risk:

Nature of Services

Carrier contracts with a physician hospital organization (“PHO”) for comprehensive health care services. The PHO contracts with hospitals and physicians to provide a network for delivery of services.

Method of Payment

Carrier pays the PHO a per member per month fee. The PHO reimburses the hospitals on a reduced fee for service basis or on a case rate basis. Generally, the physicians are paid on a capitation basis; however, specialists are reimbursed on a reduced fee for service basis.

Determination

Since the carrier’s liability is limited to a per member per month fee and the PHO’s payments to hospitals and physicians may exceed that amount, the PHO is assuming financial risk, and should be licensed as a payor or ODS.

What is an Authorized Payor?

“Authorized payors” include health maintenance organizations, health insurers and health and dental service corporations.  Other entities that may be licensed to assume risk apply with respect to Multiple Employer Welfare Arrangements and properly licensed ODS.

Trending Toward a Risk-based Future

In a recent survey conducted by the Healthcare Financial Management Association of 170 hospital and health system senior finance executives, 72% both believe their organizations have the capabilities needed to support increased levels of risk and plan to take on additional risk in the next one to three years across the following:

  • Commercial payor contracting models: 64%
  • Medicare value-based models: 57%
  • Medicare Advantage: 51%

Rules that may apply to new payment models under Medicare fee-for-service plans are very different from the state requirements that may apply when carriers and providers look to extend those arrangements to commercial plans.

Health systems would do well to ensure that as they review these alternative models, that they are as informed on the legal requirements as they are on the financial risks and rewards.

THIRD CIRCUIT CALLS wRVU COMPENSATION INTO QUESTION

by Glenn P. Prives

Recently, the United States Court of Appeals for the Third Circuit issued a decision calling into question the work relative value unit (“wRVU”) compensation structure commonly utilized by hospitals.

In U.S. ex rel. Bookwalter v. UPMC, the University of Pittsburgh Medical Center’s (“UPMC”) subsidiary physician practice entities employed neurosurgeons who performed procedures at UPMC’s affiliated hospitals. The neurosurgeons’ employment agreements provided them with a base salary based upon an annual wRVU threshold.  If a neurosurgeon exceeded the threshold, the neurosurgeon would be paid a productivity bonus of $45.00 per wRVU.  Also, if a neurosurgeon failed to achieve the annual wRVU threshold during a contract year, UPMC had the right to reduce the physician’s future base salary accordingly.

The relators argued that the wRVU compensation structure violated the Stark Law because it was an indirect compensation arrangement that did not meet any exception under the Stark Law. There were additional allegations that the Third Circuit looked at closely.  First, it was alleged that the neurosurgeons claimed to assist on surgeries when they did not, that they billed for parts of surgeries that were never performed and that they performed medically unnecessary procedures.  Second, some of the neurosurgeons recorded wRVUs that were two to three times the 90th percentile nationally.  Third, some of the neurosurgeons were compensated at or above the 90th percentile nationally, including one whose bonus alone exceeded the 90th percentile.  The Third Circuit also noted that the neurosurgical department at UPMC was among the leaders in gross revenue nationally.

The federal government previously settled with UPMC on physician billing claims for $2.5 million, but did not intervene as to allegations of false claims on the hospital side. Below, the United States District Court for the Western District of Pennsylvania dismissed the complaint for failure to state a claim, and the relators consequently appealed to the Third Circuit.

In reversing the District Court’s decision, the Third Circuit ruled in favor of the relators adopting an interpretation of the Stark Law previously utilized by the U.S. Court of Appeals for the Fourth Circuit in U.S. ex rel. Drakeford v. Tuomey. The Third Circuit held that the relators had provided enough evidence to plausibly allege a violation of the Stark Law to allow the case to move forward to the discovery phase. The relators argued that because a neurosurgeon’s aggregate compensation varied with the volume or value of the surgeon’s referrals to UPMC’s hospitals, each time the surgeon performed a procedure at a UPMC hospital, the surgeon generated a referral for the associated hospital services that could potentially constitute a violation of the Stark Law.

The Third Circuit also noted that in some instances, the compensation paid exceeded collections received by UPMC and, in fact, in other instances, the wRVU conversion factor exceeded what UPMC collected. The court opined that a healthcare provider would not want to pay a physician compensation for the physician’s professional services that exceeded collections unless the provider was making up the revenue in another way, namely, referrals for hospital services.

The decision in this case would appear to contradict previous guidance issued by the Centers for Medicare and Medicaid Services (“CMS”) that stated that productivity-based compensation is permitted under the Stark Law.

Given the Third Circuit’s decision that the relators pled a plausible cause of action, the case will now proceed to discovery to allow the relators to more fully develop their claims.

Hospitals should not necessarily rush to discontinue the use of the wRVU compensation model.  This decision allows the case to proceed to discovery, but is not a final decision on the merits of whether the conduct in question constituted a Stark Law violation.  Additionally, it should not be ignored that this decision contravenes CMS guidance and that any ultimate ruling would likely be rendered moot if the current proposed rule from CMS to amend the Stark Law becomes final.  Nonetheless, hospitals must be careful to ensure that all compensation is fair market value, that documentation of fair market value is clear and that commercial reasonableness in all such arrangements exists as well.  Hospitals should not hesitate to obtain opinions on commercial reasonableness.

CMS Rule Reducing Medicare Payments for Off-Campus Hospital Based Clinics Vacated

by Paul L. Croce

In November 2018, the Centers for Medicare & Medicaid Services (“CMS”) issued a final rule (the “Rule”) reducing payments for evaluation and management services provided at off-campus hospital based clinics, to the same rates as when provided in a physician’s office.  The Rule, which CMS described as a method to control what it viewed as unnecessary increases in the volume of outpatient services at off-campus hospital based clinics, became effective on January 1, 2019.

Prior to adoption, the Rule went through the formal notice-and-comment rulemaking process during which CMS received nearly 3,000 comments. Many of the comments suggested that CMS lacked statutory authority to implement the Rule.  CMS considered and rejected those arguments.

Almost immediately following the publishing of the Rule, the American Hospital Association, the Association of American Medical Colleges and various hospital systems from across the country filed suit seeking to vacate the Rule.  The suit was filed in the United States District Court for the District of Columbia and was captioned The American Hospital Association, et al. v. Azar, Case No. 1:18-CV-2841.

The plaintiffs in the case argued that, pursuant to 42 U.S.C. § 1396l(t)(9)(A)-(B), if CMS wanted to reduce payment rates for a particular outpatient service, it should have changed the relative payment weights and adjustments through the annual review process in a budget neutral manner. The Rule did not take budget neutrality into account.

Conversely, CMS argued that it has authority to develop a “method” for controlling unnecessary increases in volume under 42 U.S.C. § 1396l(t)(2)(F), without regard for budget neutrality. CMS further argued that the term “method” is not explicitly defined in the statute, that its approach satisfied the generic definitions of the term and deference should be given to that approach.

The plaintiffs moved for summary judgment, and the Court addressed these issues in its September 17, 2019 opinion.  Therein, the Court reviewed the context of the statutory reference to “method” and found “[t]hat context does not make clear what a ‘method’ is, but it does make clear what a ‘method’ is not:  it is not a price setting tool, and the government’s effort to wield it in such a manner is manifestly inconsistent with the statutory scheme.”  Thus, the Court found the Rule was ultra vires, vacated the applicable portions of the Rule and remanded the matter for further proceedings consistent with its opinion.

While the decision certainly benefits hospital systems across the country, this battle appears to be far from over.  Since the issuing of the Court’s opinion, CMS has filed a motion to modify the order to a remand without vacatur, or in the alternative, for the Court to stay the portion of its order vacating the Rule for sixty days to allow the Solicitor General time to determine whether to authorize an appeal.  That appeal is likely to be filed and the battle will wage on.

New Jersey Supreme Court Plows the Field for Implementation of the Medical Aid in Dying for the Terminally Ill Act

by James A. Robertson and Parampreet Singh

This post is intended to update our prior article printed in the summer edition of Garden State Focus, where we wrote about the newly enacted Medical Aid in Dying for the Terminally Ill Act (the “Act”).

The Act “permits qualified terminally ill patient[s] to self-administer medication to end [their] live[s] in [a] humane and dignified manner.”  Under the Act, “terminally ill” is defined as a patient who “is in the terminal stage of an irreversibly fatal illness, disease, or condition with a prognosis, based upon reasonable medical certainty,” with a life expectancy of six months or less.   Qualified patients choosing to exercise their rights under the Act will be required to submit their request in writing stating, among other things, that they have been fully informed of any available alternatives.  Two individuals, one who must not be a relative, entitled to any portion of the patient’s estate, or the patient’s doctor, must witness and attest to the voluntariness of the patient’s request.  With the passage of the Act, New Jersey became the eighth state in the country to allow competent, terminally-ill adults to exercise their “right to die.”

The Act was set to go into effect on August 1, 2019 when Yosef Glassman, a medical doctor, filed an order to show cause and verified complaint seeking to enjoin the implementation of the Act. Dr. Glassman’s eleven-count verified complaint alleged that the Act violated: (1) “the fundamental right to defend life”; (2) the equal protection clauses of the state and federal constitutions and the Fifth Amendment’s right to due process; (3) religious physicians’ and religious pharmacists’ First Amendment rights under the United States Constitution; (4) the “canon of common law” which prohibits killing oneself and aiding and abetting another’s death; (5) state and federal law prohibiting the felonious possession of narcotics; (6) a physician’s right to practice medicine and a pharmacist’s right to practice pharmacy by involving unwilling participants “to be involved in the machinery of death”; (7) the duty to warn; (8) the Administrative Procedure Act by failing to promulgate rulemaking, “thereby rendering its entire process of death wholly and dangerously unregulated, leaving ambiguities and contradiction in statutory language”; (9) Article Ten of the United States Constitution forbidding the institution of state action that impairs existing contracts between physicians and their patients; and (10) a physician’s obligation not to falsify records. Finally, Dr. Glassman sought declaratory relief deeming the Act unconstitutional and invalid.

 On August 14, 2019, the Chancery Court entered an order preliminarily enjoining the enforcement of the Act, concluding that the failure to promulgate regulations would cause Dr. Glassman “immediate and irreparable injury” based on the significant change in the law when “dealing with individuals who are terminally ill.” That preliminary injunction held in abeyance the effective date of the Act.

At the behest of the State Attorney General to dissolve the preliminary injunction, the Appellate Division ordered expedited briefing, to be completed by August 23, 2019, but declined to dissolve the injunction. On August 20, 2019, the New Jersey Supreme Court entered an order denying the Attorney General’s request to dissolve the preliminary injunction and declined to take any further action concerning “an issue of this magnitude” until the Appellate Division addressed the issue with “thoughtful consideration.” The Supreme Court also requested the Appellate Division to “resolve the matter expeditiously.”

Dr. Glassman raised a number of hard-hitting arguments attacking the lack of standards in the Act and potential disparate impacts on terminally ill patients. He argued that the Act:

  • Sets forth no age or literacy qualifications for witnesses of a request for medication;
  • Permits witnesses to make viatical agreements or will provisions immediately after witnessing a terminally ill patient’s request;
  • Sets forth no due diligence requirements for attending physicians to verify witness signatures;
  • Does not disqualify physicians who determine a terminally ill patient’s capacity by virtue of being a blood relative or beneficiary in a will;
  • Permits an employee or director of a facility in which a patient resides to witness a request;
  • Does not require that a check be made of the Prescription Monitoring Program before writing a prescription for a lethal drug;
  • Permits life or medical insurance agents, or insurance beneficiaries to be a witness to the terminally ill patient’s request;
  • Does not recognize the lack of uniformity in lethal medications which may involve varying degrees of pain and suffering;
  • Does not recognize that non-specialist health care professionals might apply different standards for decision-making capacity;
  • Does not recognize the potential disparate treatment of patients based on economic status and ability to pay for costly lethal pharmaceuticals;
  • Does not recognize that some medications are faster-acting than others; and
  • Does not recognize that terminally ill patients may be of sound mind when they make the request for medication, but may later become incompetent at the time of administration.

Finding that the Chancery Court “abused its discretion in awarding preliminary injunctive relief,” on August 23, 2019, the Appellate Division dissolved the restraints imposed in the Chancery Court’s August 14, 2019 order. In doing so, the Appellate Division applied the well-settled standards for injunctive relief set forth in Crowe v. DeGioia, 90 N.J. 126 (1982). First, the Court found that Dr. Glassman failed to establish that injunctive relief was necessary to prevent irreparable harm. The only harm identified, said the Court, was the Executive Branch’s failure to adopt enabling regulations, but there was no showing that the absence of such regulations harmed Dr. Glassman. At that point, no party had sought medical advice or assistance from Dr. Glassman to implement any provision in the Act. Other than a blanket assertion that there was a “material change in the law” regarding terminally ill patients, neither Dr. Glassman nor the Chancery Court identified a single provision of the Act that lacked clarity necessary for a patient or any affected individual or entity to effectuate the Act’s purpose. Moreover, the Act makes participation by physicians like Dr. Glassman entirely voluntary. “The only requirement the Act imposes on health care providers who, based upon religious or other moral bases, voluntarily decide not to treat a fully-informed, terminally-ill patient interested in ending their lives, is to transfer any medical records to the new provider selected by the patient.” Characterizing the transfer of medical records from one physician to another as a purely “administrative function,” the Appellate Division found that function to have no constitutional import, nor did it run contrary to a physician’s professional obligations.

Second, Dr. Glassman failed to demonstrate that he had a likelihood of succeeding on the merits of the claims he asserted in his complaint. The Appellate Division disagreed with the Chancery Judge’s conclusion that an injunction was necessary because the Executive Branch failed to implement enabling regulations prior to the Act’s effective date, finding that ruling to be contrary to the clear, plain and unambiguous language of the Act. Pointing out that the Act permitted but did not require the relevant administrative agencies with a vested interest in the Act’s implementation to adopt regulations, the Appellate Division stated, “[h]ad the Legislature intended the Act to remain in a period of perpetual quiescence, thereby keeping all interested parties in limbo until a half-dozen administrative bodies decided to engage in their rule-making functions, it could have clearly said so.” In fact, the “absence of agency action here,” said the Court, “may imply . . . that regulations were not necessary to implement the Act.” Further, the Court found that Dr. Glassman did not have standing to assert claims on behalf of other physicians, patients or interested family members. In addition, his claims ignore the voluntary nature of his participation under the Act and his “already existing obligation under relevant regulations to provide a patient with his or her medical records.”

Finally, the Appellate Division weighed the relative hardships that granting injunctive relief would have on the parties and concluded that the Chancery Court failed to adequately consider “the interests of qualified terminally-ill patients, who the Legislature determined have clearly prescribed rights to end their lives consistent with the Act.” Consequently, the Appellate Division dissolved the preliminary injunction.

By order entered on August 27, 2019, the New Jersey Supreme Court likewise found that Dr. Glassman failed to satisfy the Crowe v. DeGioia standards for emergent injunctive relief and determined that the Act could be implemented without further delay. By doing so, the New Jersey Supreme Court has averted a head-on collision between the Medical Aid in Dying for the Terminally Ill Act and the State and Federal Constitutions – at least for the moment…

CMS’ New Rule Targets “Bad Actors” and Anyone That Associates With Them

by John W. Kaveney

On September 4, 2019, the Centers for Medicare and Medicaid Services (“CMS”) issued a final rule allowing it to revoke health care providers’ and suppliers’ Medicare enrollment if they are affiliated with targeted “bad actors.” This first of its kind rule, issued as part of CMS’ Program Integrity Enhancements to the Provider Enrollment Process (CMS-6058-PC), will go into effect on November 4, 2019. According to CMS, this rule will “strengthen the agency’s ability to stop fraud before it happens by keeping unscrupulous providers out of our federal health care insurance programs.”

The new rule provides for several new tools in CMS’ arsenal against fraud, waste and abuse in the federal health care programs. First, it allows CMS to identify individuals and organizations that pose an undue risk based on their relationships with other previously sanctioned entities. CMS, in its press release, provides an example: “[a] currently enrolled or newly enrolling organization that has an owner/managing employee who is ‘affiliated’ with another previously revoked organization can be denied enrollment in Medicare, Medicaid and CHIP or, if already enrolled, can have its enrollment revoked based on the problematic affiliation.” Consistent with this approach, providers and suppliers are going to be required to disclose current or previous direct or indirect affiliations with a provider or supplier that has been suspended, excluded or had their enrollment revoked. The goal is to prevent those found to be involved in criminal and fraudulent conduct from continuing to reappear as part of new organizations or working with new individuals hiding behind their names.

Second, the rule will also permit CMS to now block providers and suppliers who are revoked from re-entering the Medicare program for 10 years, versus the historic 3 year revocation period before allowing re-enrollment. And, for those with second revocations, the provider or supplier can now be blocked from the federal programs for up to 20 years.

CMS believes that this new rule will help put a stop to the “pay and chase” approach that has been the historic model in addressing federal health care fraud.

As a result of this new rule, providers and suppliers will need to be even more mindful of who they do business with and understand that CMS will be taking an even more critical look at their Medicare enrollment if they affiliate with anyone who has had an issue with CMS. Given CMS will arguably be able to now act to revoke a provider or supplier based on a perception of a potential risk due to an affiliation with a “bad actor,” providers and suppliers will need to be even more vigilant given their enrollment could be targeted before they even realize there is any sort of issue. Thus, the onus is on providers and suppliers to be careful who they employ, hire, or otherwise do business with because CMS may lump you in with that “bad actor’s” reputation.

More Patient Data Has Been Compromised Through the First 7 Months of 2019 Than All of 2018

by Parampreet Singh

Each year, businesses in the health care sector invest more and more money into cybersecurity and data protection as the number of cyber-attacks and compromised patient records increases.  However, despite these efforts, successful cyber-attacks are significantly outpacing the health care sector’s efforts to protect patient data.

For example, in 2018, 15 million patient records were compromised as a result of slightly more than 500 breaches in the health care sector.  Through the first seven months of 2019, the three largest cyber-attacks alone affected more than 29.5 million patients.  The majority, and the most dangerous, of the attacks were carried out by hackers infiltrating third-party vendors or implementing successful phishing attacks. 

Of the biggest breaches thus far this year, the American Medical Collection Agency (“AMCA”) breach resulted in the largest compromise of patient data, affecting approximately 25 million patients.  Securities and Exchange Commission filings revealed that AMCA was hacked for eight months, between August 2018 and March 2019.   The compromised records included personal and financial data, such as Social Security numbers, credit card numbers, bank details, patient contact information, and sensitive medical information.  Since the breach, AMCA’s parent company, Retrieval-Masters Creditors Bureau, has filed for Chapter 11 bankruptcy protection.  It is unclear how the data breach remained undetected for such an extended period of time.  According to the company’s filing, it had slashed its staffing numbers from 113 to 25 at the end of 2018.

Another of the largest data breaches so far this year involved Inmediata Health Group, affecting 1.57 million patients.  Inmediata Health Group provides clearinghouse services and software and business processes outsourcing tools for health plans, hospitals, independent physician associations, as well as independent physicians. Officials discovered the data breach in January 2019.  Electronic health information was exposed due to a search engine function that allowed internal webpages used for business operations to be indexed.  Compromised data included patient names, contact information, medical claims data, and Social Security numbers.  Furthermore, patients affected by the data breach received multiple breach notification letters, some addressed to other patients.

Data breaches in the health care industry occur frequently and continue to grow in terms of affected patients.  Health care providers and affiliated organizations remain attractive targets for hackers due to the amount of personal information they possess.  According to the 2019 Cost of a Data Breach Report, a joint report issued by IBM Security and the Ponemon Institute (the “Report”), data breaches in the health care industry are the most costly.  According to the Report, the average cost of a data breach is $3.9 million.  The average cost of a data breach in the health care industry is $6.45 million – a difference of over $2.5 million.  Similarly, the average cost per record lost is $150, whereas the cost per record lost in the health care industry is $429.  Furthermore, according to the Report, formation of an incident response team and the extensive use of encryption reduce the cost of a data breach by an average of $360,000 each. 

Although the frequency and magnitude of data breaches have grown year by year, there are many actions that entities participating in the health care industry can implement.  These include, but are not limited to: (1) investment in, and expansion of, the information technology department, (2) implementation of updated security policies and periodic training for employees, and (3) the formation of a well-rounded incident response team.  

Injunction Issued Against Operation of New Jersey Medical Aid in Dying For the Terminally Ill Act

by John Zen Jackson

This statute in May and August was the subject of two previous postings on this blog.  As of August 1, 2019, health care providers in New Jersey were to be authorized to provide qualified terminally ill patients with prescriptions for medication which would enable the patients to end their own lives.  The phrase “terminally ill” was defined as being “in the terminal stage of an irreversibly fatal illness, disease, or condition with a prognosis, based upon reasonable medical certainty, of a life expectancy of six months or less.”  Codified at N.J.S.A. 26:16-1 et seq., the statute would not actually be operational until August 16 because of a statutory provision requiring the patient to make a second oral request no sooner than 15 days after the first request as a precondition for the physician providing the prescription.

On August 14, 2019, an Order with temporary restraints was entered by Judge Paul Innes sitting in the Chancery Division-General Equity for Mercer County enjoining the Attorney General from enforcing the statute.  The Order was issued in response to an application by Verified Complaint in the matter of Yosef Glassman v. Gurbir Singh Grewal, Attorney General of the State of New Jersey, Docket No. MER-C-53-19.  With a ten-count Verified Complaint, plaintiff sought to invalidate the statute on a number of constitutional grounds. The plaintiff is a licensed New Jersey physician with moral and religious objections to the conduct that the statute would authorize.  Judge Innes scheduled an October 23, 2019 return date for the Order to Show Cause.

The Office of the Attorney General filed an emergent motion with the Appellate Division.  The Appellate Division ordered expedited briefing to be completed by August 23, but declined to dissolve the injunctive order.  An application was then made to the New Jersey Supreme Court.  It entered an Order on August 20 denying the request for immediate dissolution of the injunction against implementation of the statute and declined to take any further action concerning “an issue of this magnitude” until the Appellate Division addressed the identical motion with the “thoughtful consideration” reflected by its order for expedited briefing.  It requested that the Appellate Division resolve the matter expeditiously.

As pointed out in prior blogs, New Jersey is the eighth state along with the District of Columbia enacting such physician-assistance in dying legislation.  There has been litigation challenging the validity of such statutes elsewhere, some of which is ongoing.

NEW YORK REAFFIRMS THAT THE CORPORATE PRACTICE OF MEDICINE DOCTRINE IS ALIVE AND KICKING

by Glenn P. Prives

The New York Court of Appeals recently issued an opinion on the State of New York’s corporate practice of medicine prohibition, holding that medical practices that give too much operational and financial control to Management Service Organizations (“MSOs”) are “fraudulently incorporated” and thus, no-fault automobile insurers have no obligation to reimburse such practices.

In the case of Andrew Carothers, M.D., P.C. v. Progressive Insurance Company 2019 N.Y. Slip Op. 04643, a MSO provided management services to a New York professional corporation that performed magnetic resonance imaging services. Several no-fault automobile insurance carriers stopped paying the practice’s no-fault claims claiming that the practice was fraudulently incorporated, and in response, the practice sued the insurance carriers for non-payment of the insurance claims. A jury found that the owners of the MSO controlled the practice, and that the practice was fraudulently incorporated such that the insurance companies could rightfully deny payment of claims.

The Court of Appeals agreed with the jury and found that, due to certain terms of the MSO arrangement, the practice ceded control of the practice to the MSO. In making its determination, the court pointed to several aspects of the arrangement including:  (i) the MSO leased equipment to the practice at above fair market value; (ii) the licensed physician had a limited role in the clinical and administrative aspects of the practice; (iii) the executive secretary of the practice with ties to the owners of the MSO ran certain clinical aspects of the practice including the discipline of providers and the handling of physician referrals to the practice; and (iv) the MSO had the right to terminate each lease without cause, regardless of payment, however no similar provision allowed the practice to terminate the leases without cause.  The court stated that “[a] material breach of the foundational rule for professional corporation licensure—namely that it be controlled by licensed professionals—[is] enough to render [that party] ineligible for reimbursement.” See Slip Op at 16. While the holding of this case is limited in scope to no-fault insurance reimbursement, the court’s examination of the relationship between the MSO and the practice is an indication that New York courts will continue to closely monitor these MSO-practice relationships to ensure that the spirit of the corporate practice of medicine remains intact.

New York’s Business Corporation Law prevents unlicensed persons from exercising control of professional corporations.  All shareholders, officers, and directors must be licensed in the profession the entity is being incorporated to practice.  Ceding too much control to non-physicians violates the Business Corporation Law.  Similar concepts apply to professional limited liability companies.

This decision does not mean that medical practices or other professional entities in New York cannot enter into arrangements with MSOs.  Instead, the decision reaffirms that these arrangements must be carefully crafted and implemented and operated with care to stay within the bounds of the law.

Dying with Dignity in New Jersey: New Jersey’s Aid in Dying for the Terminally Ill Act

by Melissa Miele Bracuti

New Jersey residents should be aware that on August 1, 2019, New Jersey’s Aid in Dying for the Terminally Ill Act went into effect.  The Aid in Dying for the Terminally Ill Act permits qualified terminally ill patients to self-administer medication to end their life in a humane and dignified manner. Both patients and physicians are protected by several safeguards built into the recently enacted New Jersey statute.

The patient must be a New Jersey resident who is at least 18 years of age and can document his or her residency with a driver’s license or identification card issued by the New Jersey Motor Vehicle Commission; a New Jersey resident gross income tax return filed for the most recent year; or other government record that demonstrates residency. The patient must be able to communicate health care decisions and be capable of making informed decisions. The patient’s attending physician and consulting physician will make the determination regarding a patient’s mental capacity.  Finally, the patient must be terminally ill, as defined in the statute. If a patient is in the terminal stage of an irreversibly fatal illness, disease, or condition with a prognosis, based upon reasonable medical certainty, of a life expectancy of six months or less, he or she will be considered “terminally ill” under the statute.

Some of the requirements for the attending physician include: (i) examining the patient and confirming that the patient is terminally ill; (ii) informing the patient of the feasible alternatives to taking the life-ending medication, including, but not limited to: concurrent or additional treatment opportunities, palliative care, comfort care, hospice care and pain control; (iii) referring the patient to a consulting physician for medical confirmation of the diagnosis and prognosis and a determination that the patient is capable of decision-making and is acting voluntarily; (iv) referring the patient to counseling with a mental health care professional; and (v) recommending the patient participate in consultation regarding the alternatives to self-administering the life-ending medication. 

Prior to providing a prescription for the medication, the physician is required to recommend that the patient notify their next of kin. Whether the patient decides to withhold notice to their next of kin is left entirely up to the patient. The patient must make two oral requests and one valid written request, in the written form set forth in the statute, to their attending physician to receive a prescription for the life-ending medication.

The State of New Jersey is now the 8th state in the United States to enact a compassionate death with dignity statute. Presently, each of California, Colorado, District of Columbia, Hawaii, New Jersey, Maine (will be effective in September 2019), Oregon, Vermont, and Washington have death with dignity statutes. The State of Montana relies on case law to permit physician-assisted deaths.

Should you wish to receive additional information, or if you have any questions relating to this topic, we invite you to contact our firm’s Private Clients Services and/or Health Care Practice Groups for further discussion.

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Recognized Complications of Treatment and Informed Consent – An Update

by John Zen Jackson

In a December 18, 2018 posting in this blog, the recent oral argument before the Pennsylvania Supreme Court in the case of Mitchell v. Shikora regarding exclusion of evidence of risks and complications of a surgical procedure was highlighted.  On June 18, 2019, a divided Pennsylvania Supreme Court filed its decision, 2019 WL 2504475, reversing the decision of the intermediate appellate Superior Court[1] which would exclude such evidence and reinstating the judgment entered on the jury verdict in favor of the defendant. The opinion helpfully illustrates how risk information can be presented at trial in support of a defense that the adverse outcome was a known complication of the procedure and not the result of negligence.

            The factual context of the case arose from a laparoscopic hysterectomy performed in 2016.  The operation began with the physician making an incision into the patient’s abdomen.  In the course of proceeding to separate the layers of tissue, the attending obstetrician-gynecologist detected fecal odor and realized the woman’s colon had been cut.  He discontinued the hysterectomy procedure and called for a general surgeon to evaluate the patient and promptly perform an operation to repair the bowel injury.  This was done with an emergency loop ileostomy during which a portion of the patient’s bowel was brought to the surface and connected to an external pouch.  The patient wore the colostomy bag for an unspecified time.

            In the opinion for the court, Justice Todd reiterated fundamental components of medical liability law.  She noted that ordinarily, a physician did not guarantee the result of treatment and that there was no presumption or inference of negligence merely because a medical procedure resulted in an unfortunate or adverse outcome.  “Indeed, the idea that complications may arise through no negligence of a physician is so ingrained in our jurisprudence that it is often included as part of the instructions to the jury.”  She emphasized, however, that an action for lack of informed consent as to possible risks and outcomes was distinct from a claim of medical negligence.  The justice emphasized a proposition that is widely accepted and had been adopted in the unanimous prior decision of Brady v. Urbas, 111 A.3d 1155 (Pa. 2015), that admitting evidence that a patient had been informed of certain risks in a pure negligence action could erroneously suggest to the jury that the patient consented to negligent care and could confuse the jury and cause it to stray from assessing the central question of whether the physician’s actions conformed to the applicable standard of care.  Nonetheless, evidence of risks and complications was properly admitted elucidating the standard of care issues.

Determining what constitutes the standard of care is complicated, involving considerations of anatomy and medical procedures, and attention to a procedure’s risks and benefits. Further, a range of conduct may fall within the standard of care. While evidence that a specific injury is a known risk or complication does not definitively establish or disprove negligence, it is axiomatic that complications may arise even in the absence of negligence. We emphasize that “[t]he art of healing frequently calls for a balancing of risks and dangers to a patient. Consequently, if injury results from the course adopted, where no negligence or fault is present, liability should not be imposed upon the institution or agency actually seeking to assist the patient.” …. As a result, risks and complications evidence may clarify the applicable standard of care, and may be essential to provide, in this area, a complete picture of that standard, as well as whether such standard was breached. Stated another way, risks and complications evidence may assist the jury in determining whether the harm suffered was more or less likely to be the result of negligence. Therefore, it may aid the jury in determining both the standard of care and whether the physician’s conduct deviated from the standard of care.

The court concluded that the testimony of the defense expert went beyond the specific injury and included the conduct of the physician and the circumstances surrounding that conduct to allow an evaluation of whether the defendant had met the standard of care and the reasons why the injury could occur in the absence of negligence.  This testimony provides a fine example of an expert providing the “whys and wherefores” that New Jersey courts have so frequently identified as essential to sustain expert testimony against a charge of being an inadmissible net opinion.[2]  It quoted this testimony at some length:

I think that really the only place in this case where one can find fault is in the initial incision into the abdomen, and during that incision is the one time during the surgery — I think you have seen pictures of how narrow a site you are going down — it is the one time in the surgery when you are making an incision into a space where you can’t really see where you are going.

You know, you are cutting through tissue that occasionally you can see through it, but very often you can’t see through it at all. Everybody is very different. Most of the time, especially going through a little incision, the more fat, the deeper the longer that incision is. That initial incision, I’ve done over 8,000 case[s] and every time I make that incision, I hold my breath[ ] because you never know 100 percent that that is going to be okay. I feel much better once you are inside and seeing, but that initial incision is when you can’t be sure.

The benefit of doing it that way is that the patient will recover faster, have less pain, sort of both the surgeons and patients are happy to take that risk because it is going to benefit them in the long run; but there is going to be those times where that incision is going to cause a problem like in this case.

Half the time that doesn’t work, half the time you just have to make sure you are pulling up the thinnest amount of tissue you possibly can after you make that cut and you are hoping that there isn’t anything on the other side.

I mean there’s always something behind the peritoneum there. There’s not like there is free space. There’s not gas in your abdomen naturally. There’s always bowel, there’s always something right on the other side of that, whether it is large intestine or small intestine. It is always an incision where there can be injury.

            It also noted this exchange during cross-examination:

Q. [Mitchell’s Counsel] I see. And, doctor, as far as the literature is concerned — well, strike that. I think you had indicated in your report that the injury that Miss Mitchell sustained was unavoidable. That’s what you said?

A. Correct.

Q. If it was unavoidable it would happen every time, wouldn’t it?

A. No.

Q. Well, I don’t understand if it is unavoidable, wouldn’t it happen every time?

A. Not necessarily. It is unavoidable in the sense that he did everything he could to avoid it, yet it still happened, so, therefore, it was unavoidable.

            In contrast, in her concurring and dissenting opinion, Justice Donohue had a different perception of this evidence: “Informing the jury that a particular injury is one that can occur during the procedure does not make it more or less likely that the injury occurred as a result of the doctor’s negligence, rendering it entirely irrelevant.”  She also emphasized that the plaintiff’s expert had identified “a crucial step” of transvisualization of the abdomen before making the cut that had not been done by the defendant.  While the defense expert acknowledged that there was no evidence that the operating surgeons had transvisualized the peritoneum before making the cut, he denied that this step was required by the standard of care.  Justice Donohue distilled the defense expert’s testimony to the following: if transvisualization is not possible (or simply not done), proceed with caution and hope for the best.  She framed the issue for the jury as whether transvisualization was required by the standard of care or not. “If so, the failure to do so was negligent; if not, it was not. These questions should have been decided exclusively on this evidence of what was expected of the surgeon in this case.”  

            There was another separate opinion in Mitchell with Justice Wechtconcurring in the result but highlighting four areas of concern.  These included an emphasis on the “imperative that judges carefully police the line between evidence of consent and evidence of risks and complications” and the exclusion of any possible use of the informed consent form that had been signed by the patient even if limited to reading the possible complications set forth in it.  He also noted that studies or literature should not be admissible “if they do not distinguish between complications that occurred as a result of negligence and those that resulted from some other cause.”  He agreed with the majority’s conclusion that this objection went to the weight rather than the admissibility of this evidence and that the parties should have the opportunity to challenge the studies in a Frye hearing.[3]    He ended with his opinion commenting on the inclusion in one submission of a report that had labeled Philadelphia as “The City of Unbrotherly Torts” and putting that city and its courts on a list of “Judicial Hellholes.”  In an admonition to those filing amicus brief, he wrote:

While amici, like parties, are free (and indeed duty-bound) to engage in zealous advocacy, it seems imprudent to rely for such advocacy upon unduly caustic or inflammatory materials that insult or cast aspersions upon the judicial system itself, or upon its component parts. Those filing briefs as friends of the court should consider this as they engage in their important work of informing and enriching the perspectives available to appellate jurists as the latter perform their jurisprudential duties.


[1]  In the blog piece, the citation for the intermediate opinion was stated incorrectly.  The correct citation is 161 A.3d 970 (Pa. Super. 2017).

[2]  The “why and wherefore” or “whys and wherefores” epigram can be found repeatedly in published and unpublished opinions.  However, the more expressive catchphrase would be the “why and therefore” for communicating the basis for the expert’s conclusion.

[3]  Pennsylvania has declined to adopt the standards for expert testimony developed in Daubert v. Merrill Dow and adheres to the test promulgated in Frye v. United States, 293 F. 1013 (D.C. Cir. 1923).  Betz v. Pneumo Abex, LLC, 44 A.3d 27, 53 (Pa. 2012).

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