Say Goodnight To The Two Midnight Rule’s Payment Reductions

The Two Midnight Rule, which was introduced as part of CMS’ FY 2014 Inpatient Prospective Payment System (“IPPS”) rule, dictates that when a physician expects a beneficiary to require care that crosses two midnights and admits the beneficiary based on that expectation, Medicare Part A payment is generally appropriate.  Conversely, if the beneficiary’s hospital stay is expected to be less than a period spanning two midnights, payment under Medicare Part A is generally inappropriate.

Because CMS anticipated significant increases in expenditures as a result of the Two Midnight Rule, CMS exercised the Secretary’s “broad authority” under 42 U.S.C. 11395ww(d)(5)(I)(i) to impose a 0.2% reduction to the national capital federal rate in FY 2014 to offset the anticipated increase in expenditures.  That same reduction was applied to the national capital federal rate in FY 2015 and FY 2016 as well.

In connection with the adoption of the Two Midnight Rule numerous commenters questioned the validity of the Secretary’s prediction of increased expenditures, upon which the decision to reduce rates was based. However, CMS never addressed these comments in detail when adopting its final rule except to say that the reductions were an appropriate use of the Secretary’s statutory exceptions and adjustments authority.

Having not received an adequate response to their comments during the rule making process, numerous hospitals filed suit challenging the 0.2% reduction. Several of those suits were consolidated before the United States District Court for the District of Columbia under the caption Shands Jacksonville Medical Center, et al. v. Burwell, Consolidated Civil Case Nos. 14-263, 14-503, 14-536, 14-607, 14-976, 14-1477 (the “Shands Litigation”).

On September 21, 2015 the Court in the Shands Litigation found that the Secretary’s failure to disclose critical assumptions made by the actuaries who calculated the alleged increase in expenditures, which was relied upon to impose the 0.2% reduction, failed to meet the standards of the Administrative Procedures Act by depriving the public of a meaningful opportunity to comment on the proposed rule. As a result, the Court remanded the matter back to the agency for further proceedings regarding the adequacy of the 0.2% reduction.

After remand, CMS issued public notice of the basis for the 0.2% reduction and its underlying assumptions.  As a result of the comments received to that public notice, CMS eliminated the 0.2% reduction for FY 2017 in connection with the FY 2017 IPPS final rule.  Additionally, CMS adjusted the FY 2017 capital IPPS rate to effectively eliminate the impact of the 0.2% reduction to rates in previous years by implementing a one-time prospective adjustment of 1.006 in FY 2017 to the national capital Federal rate.

Despite implementing this adjustment, CMS denies any error and continues to maintain that “the assumptions underlying the 0.2% reduction to the rates put in place beginning in FY 2014 were reasonable at the time we made them in 2013.”  Nevertheless, whether CMS recognized its error, or felt compelled to make this change as a result of the Shands Litigation, the end result is the same for hospitals throughout the country.  They have been relieved of the burden imposed by the 0.2% reduction associated with the adoption of the Two Midnight Rule.


Catholic Hospital Not Covered By ERISA’S Religious Exemption

The U.S. Court of Appeals for the Third Circuit in Kaplan v. St. Peter’s Healthcare System, has ruled that St. Peter’s Healthcare System’s (“St. Peter’s”) pension plan is not entitled to a religious exemption under the Employee Retirement Income Security Act (“ERISA”).

In May 2013, Laurence Kaplan, a former St. Peter’s employee filed a putative class action suit against St. Peter’s alleging, among other things, that St. Peter’s pension plan was significantly underfunded. St. Peter’s moved to dismiss the Complaint arguing that it qualified under Section 4(b)(2) of ERISA for a church plan exemption and was thus not required to comply with the provisions of ERISA which Kaplan claimed it had violated. The District Court disagreed with St. Peter’s who then sought review from the Third Circuit. 

The Third Circuit acknowledged that in the last few decades various courts “have assumed that entities that are not themselves churches, but have sufficiently strong ties to churches can establish exempt church plans.” However, the Court did not find those cases to be controlling stating that the current case is part of a “new wave of litigation” which argues that the definition of church plan precludes that result. Lower courts which have addressed this current “new wave of litigation” have been split in their decisions. 

ERISA § 3(33)(A) defines a church plan as “a plan established and maintained . . . for its employees (or their beneficiaries) by a church or a convention of churches.” Section 3(33)(c)(i) further clarifies that a “plan established and maintained” by a church “includes a plan maintained by an organization . . . controlled by or associated with a church or a convention of churches.” 

St. Peter’s argued that the clarification in Section 3(33)(c)(i) annulled the requirement that a church establish a plan in order for it to qualify for an exemption. The Court, however, relying on the plain language of the statute as well as various canons of statutory construction, found that the provision merely expanded the definition of church plan to include plans maintained by other tax exempt organizations. It did not, as St. Peter’s contended, eliminate the requirement that the plan be established by a church or convention or association of churches. Accordingly, the Court found St. Peter’s could not rely upon the church plan exemption to avoid the obligations imposed by ERISA. 

This decision will have a serious impact on religious based healthcare organizations as it imposes significant reporting and funding obligations on those organizations. However, this is unlikely to be the last word on the subject. It is anticipated that St. Peter’s will seek certiorari and the same issue is currently being addressed by the Seventh Circuit in Stapleton v. Advocate Health Care Network where the Court heard argument on September 18, 2015. Should the Seventh Circuit rule contrary to the Third, there is a good possibility the matter may ultimately be decided by the United States Supreme Court.

High Court to Weigh Healthcare Providers’ Standing to Sue States Over Medicaid Reimbursement

On January 20, 2015, the United States Supreme Court heard oral arguments in the matter of Armstrong v. Exceptional Child Care Center, et al., regarding whether healthcare providers have a right to challenge Medicaid reimbursement rates under the Supremacy Clause and Section 30(A) of the Federal Medicaid Statute or whether only the federal government is allowed to challenge rates during its approval process.

In Armstrong, a group of service providers for developmentally disabled Medicaid patients sued the State of Idaho for failing to increase Medicaid payments for several years.  Specifically, the Idaho Legislature disregarded cost studies performed by its agency which suggested the need for increased Medicaid reimbursement and instead continued to freeze rate increases through the appropriations process due entirely to budgetary considerations.  The District Court ruled in favor of the providers finding that the Legislature could not rely solely on such considerations in determining Medicaid reimbursement. The matter was appealed to the Ninth Circuit on the issue of whether the providers had standing to file such claims. The Ninth Circuit affirmed the lower court’s decision.

This case follows a long history of provider lawsuits challenging Medicaid rates under Section 30(A) which have generally been rejected by the Courts. See, Pa. Pharmacists Ass’n v. Houston, 283 F.3d 531 (3rd Cir. 2002); See also Sanchez v. Johnson, 416 F.3d 1051, 1058-1062 (9th Cir. 2005) (“[T]he flexible, administrative standards embodied in [§30(A)] do not reflect a Congressional intent to provide a private remedy for their violation”).  However, the Supreme Court, until now, has never specifically ruled on the issue.

While it is unclear how the Supreme Court will come down on the issue, its previous handling of the issue may provide some insight.  In a 2012 case from California entitled Douglas v. Independent Living Center of Southern California, 132 S.Ct. 1204 (2012), the Court was set to address this exact issue. However, the Court never clearly affirmed or negated the providers’ right to sue.  Rather, after the regulations at issue were approved by CMS, the matter was remanded back to the Circuit Court and then to the District Court.  However, four Justices (Roberts, Scalia, Thomas and Alito) issued a dissent which stated that without explicit language from Congress providing for the right to sue, private parties, such as providers or patients, should not be able to challenge Medicaid fees.

Based on the dissent issued by the four Justices, it will take a full complement of the remaining Justices to decide in favor of the providers in order for them to succeed on this appeal.  While it is unlikely that the Court will rule in favor of the providers, such a decision could lead to a flood of litigation by healthcare providers who have historically been inadequately reimbursed through the Medicaid program.  A decision is anticipated to be issued in late spring.

U.S. District Court Finds the Use of Extrapolation Evidence to Establish Liability Permissible in False Claims Act Litigation

The use of statistical sampling and extrapolation evidence has long been used to determine overpayment amounts in administrative agency decisions.  Such techniques have also been permitted to establish the quantum of damages in False Claims Act (“FCA”) cases once liability has been established.  However, courts have only permitted extrapolation evidence to prove liability in FCA cases under rare circumstances such as when a default judgment has been entered, U.S. v. Cabrera-Diaz, 106 F.Supp. 2d 234 (D. P.R. 2000) or where evidence presented to the jury provided a reasonable basis to find the defendants had a “policy and practice” of submitting false claims. U.S. ex. Rel. Loughren v. Unum Provident Corp., 604 F.Supp.2d 258 (D. Mass. 2009).

On September 29, 2014 the United States District Court for the Eastern District of Tennessee was asked to determine whether the Government could establish liability under the FCA based on extrapolation evidence.  The court answered in the affirmative.

In U.S. ex. Rel. Martin and Taylor v. Life Care Centers of America, Inc., Case No. 1:08-cv-251 a qui tam FCA claim was asserted against Life Care Centers of America (“Life Care”), a corporation headquartered in Cleveland, Tennessee which owns over 200 skilled nursing facilities. The allegations against Life Care were that (1) it pressured its therapists to target Ultra High Resource Utilization Groups (“RUG”) levels and longer average length of stay period for patients in order to maximize its Medicare revenue; (2) it billed Medicare for services that were “medically unreasonable, unnecessary, and unskilled”; and (3) it knew it was billing for medically unreasonable, unnecessary and unskilled services based on numerous complaints by its employees to Life Care’s compliance officer and corporate Rehabilitation Services offices which were either ignored, minimized or retaliated against.

When the Government indicated that it would not undertake a claim-by-claim review but rather use a random sample and extrapolate it to the universe of claims, Life Care moved for partial summary judgment claiming liability could not be determined in such a manner.  In a detailed decision, the court denied Life Care’s motion finding that such evidence could be presented by the Government but that the weight accorded to that evidence would be left to the fact finder.  The court believed that categorically “limiting FCA enforcement to individual claim-by-claim review would open the door to more fraudulent activity because the deterrent effect of the threat of prosecution would be circumscribed.”

The court reviewed each element of an FCA claim and determined that the Government would be able to rely on statistical sampling and extrapolation to establish each.  However, there was one notable exception.  As to the element of knowledge, the Government indicated that it would not be using statistical sampling as proof. Rather the Government would proffer “evidence of [Life Care’s] corporate practice and pressure, and that Life Care knew those practices likely caused the submission of false claims given the complaints it received nationwide from its employees.”  Because such evidence would establish that Life Care acted “in reckless disregard of the truth or falsity of the information” it could potentially establish the knowledge required under the statute. 31 U.S.C. 3729(b)(1).

Ultimately, the case falls within the same category as United States ex. rel. Loughren v. Unum Provident Corp., 604 F.Supp.2d 259 (D. Mass. 2009) which allows liability to be established through evidence that a defendant’s “policy and practice” was to submit false claims.  The court specifically held that based on the Government’s representation as to the type of evidence it would present (no evidence was actually presented to the trial court) it was not attempting to use the “collective knowledge” theory to establish scienter; a theory which has never been successfully applied to an FCA case before.

Nevertheless, the limited instances where extrapolation evidence has been permitted to be used to establish FCA liability makes this a significant development in FCA case law.  It will be interesting to see what weight the jury places on this evidence should the matter proceed to trial and what weight other courts will give to this decision.

Third Circuit Adopts More Liberal Pleading Standards For Claims Brought Under The False Claims Act

On June 6, 2014, the United State Court of Appeals for the Third Circuit issued a decision in Foglia v. Renal Ventures Management, LLC, Docket No. 12-0450, which reversed the New Jersey District Court’s dismissal of a False Claims Act (“FCA”) case for failure to satisfy the heightened pleading requirements in F.R.C.P. 9(b).

Foglia was a registered nurse formerly employed by the defendant, Renal Ventures Management, LLC (“Renal”), a dialysis care company.  Foglia alleged Renal violated the FCA by falsely certifying that it was in compliance with state regulations related to quality of care, falsely submitting reimbursement claims for the drug Zemplar, and reusing single-use Zemplar bottles.  The Disctrict Court granted Renal’s 12(b)(6) motion finding that because Foglia failed to “identify representative examples of specific false claims made to the Government” his pleading did not meet the standard of F.R.C.P. 9(b).

In reviewing the matter, the Third Circuit stated that it had not previously ruled specifically on what F.R.C.P. 9(b) requires of a FCA claimant, and noted that the other Circuits were split as to the appropriate requirements.  The Fourth, Sixth, Eighth and Eleventh Circuits require a FCA plaintiff to show “representative samples” of the alleged fraudulent conduct, specifying the time, place, and content of the acts, and the identity of the actors.  Conversely, The First, Fifth and Ninth Circuits require only that the plaintiff allege “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.”

The Third Circuit ultimately adopted the more nuanced standard of the First, Fifth and Ninth Circuits.  In doing so, it pointed out that “it is hard to reconcile the text of the FCA, which does not require that the exact content of the false claims in question be shown, with the ‘representative samples’ standard favored by” the other Circuits.  The court further noted that in a recent brief for the United States, as amicus curie, the Solicitor General indicated that the United States believed the more rigid standard followed by the Fourth, Sixth, Eighth and Eleventh Circuits, undermined the effectiveness of the FCA to combat fraud against the United States.

The Third Circuit ultimately reversed the District Court’s decision and remanded the matter for further proceedings.  A copy of the Third Circuit’s decision can be found here.

As Open Enrollment Closes, Secretary Sebelius Steps Down

On Friday April 11, 2014 President Obama announced the resignation of Health and Human Services Secretary Kathleen Sebelius.  The announcement comes after months of derision and calls for her resignation from Republican lawmakers following the troubled rollout of the website.

Despite the difficulties of the past several months, Secretary Sebelius’ resignation comes at what many supporters consider a high point, only days after the March 31, 2014 enrollment deadline under the Affordable Care Act during which more than 7 Million people enrolled for insurance coverage.

In connection with the resignation announcement, President Obama nominated Sylvia Mathews Burwell, the current Director the Office of Management and Budget, as Secretary Sebelius’ replacement.

The choice of Burwell as replacement may signal that the President wants to avoid a contentious election year fight to fill the HHS post as Burwell was unanimously confirmed by the Senate to her current post just last year.  However, given the current contentious atmosphere in Washington, particularly as it relates to the Affordable Care Act, it is hard to believe the confirmation process will be as easy this time around.

Nevertheless, Burwell’s confirmation is nearly assured. With the recent rule changes on most executive and judicial branch nominations, Democrats need only 51 votes to confirm her, and the party controls 55 votes in the chamber.

Recent District Court Decision Highlights Potential Conflicts Between Goals of the Affordable Care Act and Antitrust Laws

The Affordable Care Act (“ACA”) promotes the formation of Accountable Care Organizations (“ACO”) designed to improve patient outcomes and lower the overall cost of medical care.  However, a recent decision by the United States District Court for the District of Idaho, in Saint Alphonsus Medical Center, et al. v. St. Luke’s Health System, LTD, Docket No. 1:12-CV-00560-BLW, highlights the fact that the goals of the ACA do not override the antitrust concerns regarding the potential anticompetitive effects such organizations may have on the healthcare market.

The Idaho suit was brought by the Federal Trade Commission as well as two of the merged entity’s competitors, who contended the acquisition would have anticompetitive effects.  The merged entity, which was formed by St. Luke’s Health System and a Saltzer Medical Group, argued that the acquisition was primarily intended to improve patient outcomes.

In its decision, the District Court noted that it believed that if left intact the acquisition would have indeed improved patient outcomes.  In fact, the court stated that “St. Luke’s is to be applauded for its efforts to improve the delivery of health care in the Treasure Valley.” Nevertheless, the District Court concluded that the potential for improved patient outcomes was outweighed by the potential anticompetitive effects including the risk that the combined entity would use its dominant market share to (1) negotiate higher reimbursement rates with health plans and (2) charge more for ancillary services at higher hospital-billing rates.  Thus, the District Court found the affiliation to violate Section 7 of the Clayton Act and ordered the acquisition to be unwound.

The decision reminds us that when forming ACOs through vertical and horizontal integration, health care organizations must remain cognizant of the potential effects of such organizations on market competition.  Regardless of the goals of the entities forming such organizations, it will be the potential effects on competition which determines whether the affiliations run afoul of the antitrust laws.

Proposed HIPAA Rule Change Potentially Threatens Second Amendment Rights Without Due Process of Law

On January 7, 2014 the U.S. Department of Health and Human Services (“HHS”) issued a notice of proposed rulemaking to modify the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) Privacy Rule to expressly permit certain HIPAA covered entities to disclose to the National Instant Background Check System (“NICS”) the identities of individuals who are subject to a Federal “mental health prohibitor” which disqualifies them from shipping, transporting, possessing, or receiving a firearm. The proposed rule would permit disclosure of only the fact that the individual is subject to the prohibitor, not the underlying diagnosis, treatment records or other protected health information (“PHI”).

Among the persons disqualified from receiving firearms under the “mental health prohibitor” are individuals who have been “adjudicated as a mental defective” or “committed to a mental institution.” 27 C.F.R. 478.32(a)(4). Included in those “adjudicated as a mental defective” are individuals found incompetent to stand trial or not guilty by reason of insanity as well as those determined by a court, board, commission, or other lawful authority to be a danger to themselves or others or lacking the capacity to contract or manage their own affairs. “Committed to a mental health institution” includes not only commitment for mental illness, but also commitment for other reasons, such as drug use. 27 C.F.R. 478.11.

HHS indicates that the rule is designed to address perceptions that HIPAA creates a barrier to entities reporting information to NCIS. In this regard, HHS notes that the vast majority of determinations of incompetence and involuntary commitments are originated in the justice system by entities which are not HIPAA covered entities. Thus, HHS believes the proposed rulemaking merely resolves any perceived ambiguity and clarifies the authority of these entities to report information to NCIS.

However, it has been suggested that the rule change may have a more significant impact. While HHS states the rule change is an attempt to balance individual privacy rights against the public safety, opponents suggest additional considerations should be weighed. Commitment procedures vary from state to state and some states permit mental health providers to commit individuals without prior adjudication. HHS responded to earlier comments on this subject by noting that those states still require the information to eventually be shared with the judicial system. Opponents of the rule argue that by permitting disclosure by the mental health provider directly, rather than limiting disclosure to non-covered entities such as the judicial system, the proposed rule change fails to ensure the individual has received appropriate judicial review prior to reporting. Thus, it is argued by some that reporting of a commitment will result in a deprivation of an individual’s Second Amendment rights and, therefore, it is essential that the individual be provided appropriate due process protections, if not prior to commitment, prior to reporting.

To address these issues, amendments would be required to the definition of “committed to a mental institution” to ensure an individual receives appropriate procedural protections prior to being committed and reported to NCIS. The U.S. Department of Justice (“DOJ”) issued a proposed rule change related to that definition on the same day HHS issued its proposed rule. However, the proposed DOJ rule addresses whether the term includes both inpatient and outpatient treatment, and whether it applies to commitments of individuals while under the age of majority. The DOJ’s proposed rule does not address what procedural protections would be provided to a patient prior to being “committed to a mental health institution” and subject to the mental health prohibitor.

It is fair to expect that these and other concerns will be addressed during the comment periods on the proposed rules; the comment periods for the proposed HHS and DOJ rules expire on March 10, 2014 and April 7, 2014 respectively.