Legislation to Increase Financial Resources Provided through New Jersey Medicaid Program and to Establish County Option Hospital Fee Pilot Program Quietly Took Effect in April

by Parampreet Singh

On April 30, 2019, N.J.S.A. 30:4D-7r et seq., the County Option Hospital Fee Pilot Program Act (“Act”) establishing the County Option Hospital Fee Pilot Program (the “Pilot Program”), went into effect.  The bill was sponsored by Senators Joseph F. Vitale and M. Teresa Ruiz, and Assemblyman Craig J. Coughlin.  Governor Phil Murphy signed the bill on November 1, 2018.    

The Act creates a pilot program which will be overseen by the Commissioner of the New Jersey Department of Human Services (“DHS”).  The Act will initially allow seven qualified counties to participate in the Pilot Program, and grant them the authority to “impose a local health-care related fee on hospitals.”  The stated purpose of the Pilot Program is “to increase financial resources through the Medicaid program to support local hospitals and to ensure that they continue to provide necessary services to low-income citizens; and to provide participating counties with new fiscal resources.” 

In order to qualify for the Pilot Program, a county must have “a population greater than 250,000,” based on the most current federal census data available as of the effective date of the Act, with a municipality that is classified as a first or second class municipality, or a fourth class municipality with a population greater than 20,000, pursuant to N.J.S.A. 40A:6-4.  Furthermore, the municipality must have a Municipal Revitalization score greater than sixty, based on the New Jersey Department of Community Affairs’ calculations. 

Participating counties must submit proposed fees and expenditure reports to the Commissioner to ensure compliance with state and federal law.  Prior to submitting the fees and expenditure reports, the counties are required to “consult with affected hospitals within” their jurisdictions.  After submission, the Commissioner shall provide affected hospitals with twenty-one calendar days to provide comments.  The proposed fees must be “implemented in accordance with the provisions of 42 U.S.C.A. 1396b(w)(3)(A),” and subject to the limitations of 42 C.F.R. 433.68(f)(3).  42 U.S.C.A. 1396b(w)(3)(A) outlines the requirements for a fee to qualify as a “health care related tax,” and requires at least eighty-five percent of the burden of the tax to fall on health care providers.  42 C.F.R. 433.68(f)(3) sets forth the conditions under which a taxpayer will be considered to be held harmless. 

Additionally, a county may exempt a specific hospital from within its jurisdiction from the imposed fee, as long as “the exemption complies with the requirements of 42 C.F.R. 433.68.”  Furthermore, at least ninety percent of the funds collected must be used to benefit hospitals within the collecting county’s jurisdiction, and at least one percent of the fee must be transferred to DHS to cover administrative costs.  The Act is silent with respect to how the remaining nine percent of the collected funds can be utilized. 

The Act explicitly prohibits affected hospitals from passing on the costs of the fee to patients or insurers.  Notably, the Act acknowledges that “funds generated by the fee shall not supplant or offset any current or future State funds allocated to a county participating in the pilot program” and “payments distributed to hospitals . . . shall not supplant or offset any current or future funds paid to hospitals through other State or federal funding mechanisms or pools.”

Based on the requirements set forth in the Act, the counties most likely to be eligible for the Pilot Program are: Atlantic, Burlington, Camden, Gloucester, Essex, Hudson, Mercer, Middlesex, Monmouth, and Passaic.  According to Senator Vitale, “while Medicaid is the safety net that prevents low-income New Jerseyans from falling through the cracks, hospitals need to be well-funded and supported to properly deliver expert care to the community they serve.”  Furthermore, Senator Vitale believes the “pilot program will expand the resources for Medicaid and funnel funds into those facilities that ensure the disadvantaged continue to receive the quality care they need.”

It will be interesting to monitor the health care community and county legislators’ reactions to the actual implementation of this Act.  On the one hand, only seven out of ten potentially eligible counties will be authorized to participate in the Pilot Program, leaving at least three, if not more, counties unable to impose health-care related fees on hospitals within their jurisdictions to raise funds like their sister counties.  On the other hand, hospitals in seven counties will be subject to additional financial burdens, unlike the hospitals in the remaining fourteen counties not qualified or chosen for the Pilot Program.  Furthermore, the Act’s silence with respect to the remaining nine percent of the funds collected through the Pilot Program (requiring at least ninety percent to be distributed to hospitals within a county’s jurisdiction and at least one percent to be transferred to DHS for administrative costs) may become a point of contention for hospitals and counties alike.

DOH MEDICAL MARIJUANA EXPANSION SET FOR COLLISION COURSE WITH THE LEGISLATURE

by Fruqan Mouzon

These days we are reminded daily of the growing pervasiveness of the combat sport affectionately known as Trenton Politics.   These high level and demonstrably public squabbles include, but are most-assuredly not limited to, whether to impose additional taxes on those making over seven figures, the extent to which the identity of donors to so-called “dark money” groups should be disclosed, and whether the state should reduce spending on public employee benefits. Also tied up in the overtly quarrelsome atmosphere of Trenton politics is how to expand New Jersey’s Medical Marijuana Program to cover a shortening supply. 

Despite having previously kept the medical marijuana legislation closely tied to recreational use and liberal social justice reforms, the Legislature has recently agreed to remove the tether and allow these issues to be considered separately.  It endeavored to quickly move the medical marijuana legislation through both houses, and allow the public to vote on legalization for recreational use. 

The resulting bill is comprehensive.  Notably, the legislation calls for the creation of a five-member Cannabis Regulatory Commission in, but not of, the Department of Treasury.  This Commission would be charged with overseeing the licensing and regulation of cannabis for patients with diagnosed illnesses such as opioid use disorder, glaucoma, anxiety, inflammatory bowel disease, Tourette’s syndrome, post-traumatic stress disorder (PTSD), multiple sclerosis, muscular dystrophy and others. The bill establishes an Office of Minority, Disabled Veterans, and Women Medical Cannabis Business Development and contains an aspirational goal of having 30% of the market participants consist of members of those groups.  It also would make it unlawful to discriminate against medical marijuana prescription holders in employment, housing, education, and child custody.  Further, the bill sets clear testing standards for medical cannabis and cannabis products and requires the Commission to provide an annual report to the Governor and Legislature detailing, among other things, the number of applications received, the number of applications rejected, motor vehicle stops related to marijuana and statistics on the racial, gender, ethnic and age breakdown of those who continue to be arrested for marijuana offenses.      

After several technical amendments, the bill passed the Senate on May 30th.  The Assembly is set to vote on the bill Monday, June 10th and, by all indications, will pass it by a large margin.  It could therefore be on the Governor’s desk for his consideration as early as that same day.  The Governor and the Department of Health (DOH), however, chose not to wait until the bill made it through the Legislature before responding to the legislative initiative.  Rather than wait the extra week, on June 3rd, the DOH issued a Request for Applications (RFA) announcing plans to begin accepting applications on July 1st for thirty-eight new medical cannabis establishments in North Jersey, the same number in Central Jersey and thirty-two in the Southern part of the State.

Obviously, the DOH could not condense a massive 130-page piece of legislation into a 12-page RFA.  The question thus becomes: does the Governor go along with the clearly well-thought out plan of the Legislature and sign the bill or does he go it alone?   Will this bill just become yet another pawn in the chess match underway between the Governor and the Legislature?  And, if the Governor decides NOT to sign the bill, does the Legislature have the political will to muster up 27 votes in the Senate and 54 votes in the Assembly and override the veto?  Some would say, if there was ever an occasion for the Legislature to override the Governor, it is when the question before them is whether to allow the Governor to ignore their work.  

Weighing in favor of the Governor taking out his pen and affixing his John Hancock is the fact there are several provisions not mentioned in the RFA but included in the legislation that would be very attractive politically.   For example, the creation of an Office of Minority, Disabled Veterans, and Women Business Development along with the goal of having 30% of the permits awarded to disadvantaged groups will be difficult for the Governor to disregard. Also, the annual reports, testing standards and sheer comprehensive nature of the legislation may very well encourage the Governor to choose cooperation.

However, some Trenton insiders think the Governor would be inclined to veto the bill – choosing to favor having full power of the program in the hands of the Department of Health, rather than in an independent Commission with five members (two of which will be appointed by Legislative leaders Sweeney and Coughlin).  Still yet, might the Governor postpone his action and use consideration of this bill as leverage to encourage legislative approval of the millionaire’s tax? 

Signature, veto, and override are all possible.  Drama, however, is certain.   

Stay tuned.

NEW JERSEY SEEKS TO EXPAND MEDICAL MARIJUANA PROGRAM

by Paul L. Croce

After the New Jersey Legislature was unable to come to an agreement on the terms of a bill to legalize recreational marijuana, they have refocused their efforts to greatly expand New Jersey’s current medical marijuana program.

On May 23, 2019, the New Jersey Assembly overwhelmingly passed the “Jake Honig Compassionate Use Medical Cannabis Act” by a vote of 65-5.  The bill, if ultimately adopted by the New Jersey Senate and Governor, would greatly increase patient access to medical marijuana.  Key elements of the bill include expanding the number of permits for medical marijuana businesses, increasing the limits on the amount of medical marijuana a patient can purchase, limiting the number of appointments a patient must have with a physician before a formal recommendation for medical marijuana treatment and expanding the methods by which patients can obtain medical marijuana.

Under the bill, the number of permits for medical marijuana businesses would be increased from twelve to twenty-three. Additionally, it would break up the permitting system to allow businesses to seek permits for only one aspect of the medical marijuana business such as retail sales, growing or manufacturing.  Under the current system, businesses are required to engage in all aspects of the market including growing, packaging, processing and sales.

The amount of medical marijuana patients are permitted to purchase would also be increased from two to three ounces per month.  The bill would also eliminate the requirement that the patient have at least a year long history of regular visits with the prescribing physician, prior to a recommendation for medical marijuana treatment. Patients and advocates had previously criticized these limitations arguing they prevented or delayed certain patients from obtaining access to needed medication.

The bill also increases access for patients who may be unable to travel to a dispensary to pick up their medication by permitting deliveries and increases the number of designated caregivers who can pick up a patient’s medication from one to two.

Under the new bill, a five-member Cannabis Regulatory Commission (the “Commission”) in the New Jersey Department of Treasury would be set up to assume the oversight and regulatory powers previously designated to the New Jersey Department of Health (the “DOH”).  The Commission would include at least one “social justice” member representative from a national organization with a “stated mission of studying, advocating, or adjudicating against minority historical oppression, past and present discrimination, unemployment, poverty and income inequality, and other forms of social injustice or inequality.”

Other aspects of the proposed bill include a sales tax of 6.625% to be phased out on January 1, 2025, authorizing municipalities with a dispensary within their borders to impose a 2% transfer tax, permitting municipalities to enact ordinances creating consumption areas for patients, authorizing physician assistants and some advanced-practice nurses to recommend medical marijuana treatment, and permitting patients who have received medical marijuana cards in other states to receive their medication in New Jersey for a period of up to six months.

The bill passed the Senate on May 29, 2019 by a vote of 33-4.  However, the Senate’s bill included a last minute amendment which would allow cannabis industry employees to unionize.  Accordingly, the Assembly must re-vote on the amended bill before it is presented to the Governor for final approval.  That vote may come as soon as June 10, 2019.

The Governor has not indicated whether he would sign the bill in its current form.  However, the DOH, on June 3, 2019, announced plans to begin accepting applications for 108 new medical marijuana businesses.  That number contradicts, and is significantly higher, than that in the proposed legislation.  Under the DOH’s plan, the new licenses would be split by regions with thirty-eight licenses each in the North and Central Regions and thirty-two in the Southern Region.  The DOH indicated it wishes to see these licenses result in twenty-four new growers, thirty new processors and fifty-four new retailers.

It is clear New Jersey is ready to expand its medical marijuana program.  However, given the separate, and somewhat conflicting, efforts to do so, it remains unclear exactly what the final terms of that expansion will be.

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Is a Supergroup the Right Fit For You?

by Glenn P. Prives

As it gets harder and harder out there for an independent physician or a small, unaligned physician practice to survive, supergroups or group practices without walls continue to gain in popularity.  A supergroup is a group of physicians or physician practices coming together under a single employer identification number in the organization of a single legal entity.  Some supergroups focus on one specialty while others are multi-specialty.

Like everything in life, there are pros and cons to supergroups and whether or not a particular attribute is a pro or a con may vary from physician to physician.  This post reviews some of the most important advantages and disadvantages.

Pros

Supergroups allow physicians to share, and reduce, expenses.  This is most often done in the context of consolidating back office functions and non-clinical staff.  Sharing non-clinical staff can allow physicians to build a more sophisticated administrative operation and pool their resources to hire more experienced staff and executives.  It also generally allows physicians to further divest themselves from involvement in administrative services and focus more on clinical care, an aim of many physicians.  Moreover, physicians can utilize the existence of a centralized administrative office to reduce the amount of space that they lease in their individual offices.  Physicians can also gain greater power to negotiate with suppliers and purchase more supplies in bulk thereby saving more money.

Supergroups are generally, by their nature, large groups (hence the term “super”).  In this day and age, more physicians can translate into better leverage with payors which can translate into higher reimbursement rates.

Physicians can use their greater resources in a supergroup to invest in technology to keep up with the ever increasing burden of regulations and reporting systems that require extensive use of technology as well as hopefully deliver higher quality care by harnessing data.

Additionally, as reimbursement continues to plateau or decrease, many physicians are looking at ancillary revenue streams.  However, to gain a share of this revenue, generally, a not insignificant capital investment is necessary.  Supergroups, with their greater resources, are better positioned to invest this capital as well as achieve savings by purchasing equipment that can be shared by multiple physicians in the group, thereby keeping costs down.

Joining a supergroup can also allow a physician to affiliate with a hospital without giving up much in the way of independence.  There are supergroups that are managed by a health system, but which otherwise generally allow the physicians to practice as they always have been.  The health system is usually paid a fair market value management fee for the management services provided to the supergroup.  Also, the affiliation of a supergroup with a hospital may give the supergroup more leverage in negotiations with payors, thereby providing an additional benefit to its member physicians.

Being a part of a supergroup may also allow a physician to establish a channel with private equity firms.  Many physicians want to enter into deals with private equity firms, but either are too small to gain notice or do not have a sophisticated enough back-office operation in order to appear attractive.  Supergroups can work on establishing more robust administrative operations, add physicians to grow larger and then approach private equity as a more attractive target with additional negotiation power.  

Cons

Despite the relative independence of physicians and profit centers in supergroups, there will still be some loss of independence.  A physician will no longer be his or her only boss as it is inevitable that some decisions will be made by a centralized board.  The extent of those decisions does vary by group.  Even if every physician is a member of the board (not advisable), each physician will have only one vote, and one vote will not be enough to carry the day.

A clash of cultures is a possibility as well.  Different physicians and practices have different ways of doing things, and given the centralization of some aspects of the group, fights over cultures do occur from time to time.

There is also a cost in forming a supergroup.  Practices will incur expenses in coming together to form the entity, develop governing documents, contribute assets, merge benefit plans and hire new management.  While these costs will hopefully be dwarfed over time by savings and higher profit margins, this is not a guarantee.

There will also be business and legal obstacles in coming together.  Some practices may be more profitable than others.  Some may carry higher overhead than others.  Some may be more productive than others.  Additionally, Stark law compliance is paramount in forming a supergroup, particularly if there are ancillary services involved that are considered “designated health services” under the Stark law.

Forming or joining a supergroup is a big decision and can be a daunting task for physicians.  It is important to consider all of the issues involved and assess the ramifications carefully before jumping completely into the pool.

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New Jersey becomes Eighth State to Pass Death with Dignity Legislation

by Parampreet Singh

On March 25, 2019, both the New Jersey Assembly and the New Jersey Senate passed the Medical Aid in Dying for the Terminally Ill Act (the “Act”).  The final version of the bill was sponsored by Assemblyman John J. Burzichelli and Assemblyman Tim Eustace.  Governor Phil Murphy signed the bill into law on April 12, 2019 stating, “Today’s bill signing will make New Jersey the eighth state to allow terminally ill patients the dignity to make their own end-of-life decisions – including medical aid in dying.  We must give these patients the humanity, respect, and compassion they deserve.”

The Act “permits qualified terminally ill patient[s] to self-administer medication to end [their] live[s] in [a] humane and dignified manner.”  New Jersey is now only the eighth state in the country to allow competent, terminally-ill adults to exercise their “right to die.”  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.” 

Furthermore, qualified patients choosing to exercise their rights under this 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 the voluntariness of the patient’s request. 

A “right-to-die” bill was first introduced in New Jersey in 2012.  Proponents of the Act believe it gives adults the right to control their lives, die with dignity if they so choose, and decrease their prolonged pain and suffering.  Proponents of the Act also believe that there are enough safeguards in place to protect vulnerable, elderly adults. For example, the Act requires a patient to make several requests prior to receiving a prescription.  Additionally, not all terminally-ill patients who request and receive the medication will actually end up self-administering the medication – some patients simply like having the option of requesting such medication. 

Opponents of the bill argue that once a “right-to-die” bill is passed, New Jersey will be unable to outlaw the practice.  Further, they argue that vulnerable adults may misuse the Act, while certain adults may feel pressured to end their lives, viewing themselves as burdens to their families.  A 2015 Rutgers-Eagleton poll found that sixty-three percent of New Jersey residents support the passing of a “right-to-die” bill. 

It will be interesting to monitor the effects of these statutes on physicians, psychologically and professionally.  It is debatable whether providing such medications to terminally ill patients in pain can be reconciled with a physician’s Hippocratic oath to do no harm.  It will also be interesting to see what, if any, pressure will be placed upon doctors to provide such services to patients given that many may have moral objections to administering such medications.

HHS Actually Takes Action to LOWER the Penalties For One Of Its Enforcement Laws

by John W. Kaveney

On April 29, 2019, the United States Department of Health and Human Services (“HHS”) announced in the Federal Register through a Notification of Enforcement Discretion that effective immediately, it would be exercising its discretion regarding the application of HHS regulations concerning the assessment of Civil Monetary Penalties (“CMPs”) under the Health Insurance Portability and Accountability Act (“HIPAA”) and the Health Information Technology for Economic and Clinical Health (“HITECH”) Act. Specifically, HHS has changed its uniform cumulative annual CMP limit across the four categories of culpability and replaced it with tiered annual CMP limits increasing as the categories of culpability increase in severity.

In 2009, HITECH established four tiers of culpability with increasing penalties based on increasing severity. Those categories included: (1) the person did not know (and, by exercising reasonable diligence, would not have known) that the person violated the provision; (2) the violation was due to reasonable cause, and not willful neglect; (3) the violation was due to willful neglect that is timely corrected; and (4) the violation was due to willful neglect that is not timely corrected.

At the time of enactment of the HITECH Act, discrepancies were identified in the descriptions of the penalty ranges and uncertainty existed surrounding whether the $1,500,000 annual cap on CMPs should be applied to all of the categories of culpability. In the final regulations implementing HITECH that were adopted by HHS in 2013, the $1,500,000 annual cap was confirmed by HHS to apply to all categories. And, ever since then, HHS has been issuing penalties under the following framework:

Culpability Min. Penalty per Violation Max. Penalty Per Violation Annual Limit
No Knowledge $100 $50,000 $1,500,000
Reasonable Cause $1,000 $50,000 $1,500,000
Willful Neglect  – Corrected $10,000 $50,000 $1,500,000
Willful Neglect – Not Corrected $50,000 $50,000 $1,500,000

However, in a sudden change of position, HHS’ guidance this past week states that upon further review of the statute, it believes a better reading of the statute is to provide a tiered annual limit. Thus, under HHS’ new interpretation, there are new maximum annual limits to HIPAA enforcement actions as follows:

Culpability Min. Penalty per Violation Max. Penalty Per Violation Annual Limit
No Knowledge $100 $50,000 $25,000
Reasonable Cause $1,000 $50,000 $100,000
Willful Neglect  – Corrected $10,000 $50,000 $250,000
Willful Neglect – Not Corrected $50,000 $50,000 $1,500,000

It is unclear how the “No Knowledge” category will work given that the maximum penalty per violation remains at $50,000 while the annual limit is only $25,000. A review of the Federal Register entry from HHS confirms these to be the numbers published by HHS, and thus, until HHS offers further guidance or begins applying these new figures to specific cases, there remains some uncertainty for this category of culpability.

Nevertheless, these changes should come as welcome news to providers and business associates trusted with protected health information (“PHI”) as a penalty for a HIPAA violation can add up quickly. Thus, these new annual limits will help to curb the financial sting of a violation, especially when the provider or business associate either is genuinely unaware of the violation or takes appropriate action in response to a violation. Only time will tell whether HHS’ clarification of its reading of the statute to require lesser annual CMP penalty caps marks a general shift toward lower penalties or fewer enforcement actions overall.

In the meantime, it would be wise for providers and business associates to continue demonstrating good faith compliance efforts to try and minimize the tier of culpability within which a particular penalty falls. Only through ongoing reviews, audits and assessments of privacy policies and procedures and general compliance programs will providers and business associates remain prepared and help to mitigate the penalty of a potential HIPAA violation.  Certainly with these new tiered annual CMP caps, those that handle PHI have an even greater incentive to remain focused on effective compliance efforts.

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HHS Announces New Payment Model for EMS Services

by Megan R. George

On February 14, 2019, the United States Department of Health and Human Services (“HHS”) announced the launch of a new payment model for emergency ambulance services, Emergency Triage, Treat, and Transport (“ET3”), with the goal of allowing emergency medicine services (“EMS”) and ambulance service providers to triage and treat Medicare beneficiaries more efficiently and effectively. According to HHS Secretary Alex Azar, “this model will create a new set of incentives for emergency transport and care; ensuring patients get convenient, appropriate treatment in whatever setting makes sense for them.”

Currently, Medicare regulations only allow EMS and ambulance service providers to obtain reimbursement for services only if the patient has been transferred to a hospital (including the emergency department), a critical access hospital, a skilled nursing facility or a dialysis center. Because of this restriction, Medicare patients that have dialed 911 for a medical emergency are transported to one of the aforementioned facilities even if that patient does not require the level of care that these destinations provide. For example, if a Medicare patient has a laceration on his or her wrist, the patient would likely be transferred to the closest emergency department for sutures or in some cases, a bandage.  Under the ET3 model, EMS providers and ambulance service providers will now have greater flexibility to address the health care needs of Medicare beneficiaries requiring medical transport for a medical emergency for which they have accessed 911 services. ET3 broadens the scope under which the Centers for Medicare and Medicaid Services (“CMS”) will reimburse the transportation provider by now paying for (i) patient transfer to a hospital emergency department, (ii) patient transfer to a primary care physician office or urgent care clinic, and (iii) any treatment provided by a qualified health care practitioner in place (i.e., emergency medical technician (“EMT”)) or via telehealth. In addition, ET3 will encourage the development of telephonic triage centers for low-acuity 911 calls in regions where Medicare enrolled ambulance suppliers and providers operate in an effort to improve the quality of care and lower costs by reducing unnecessary transports to hospital emergency departments and unnecessary hospitalizations. Along with lowering the cost to the government payor, the patient who received treatment at a lower acuity facility, on scene, or through telemedicine, may also save on out-of-pocket costs that are not covered by their Medicare plan. Using the prior example, under ET3, the patient with a laceration on his or her wrist could now be treated at an urgent care facility or receive sutures from a licensed EMT or paramedic, reducing the cost and also keeping a bed open in the emergency department for higher acuity patients needing such care.

The ET3 model will be available to all Medicare-enrolled ambulance service providers and hospital-owed ambulance providers.  As part of a multi-payor alignment strategy, CMS plans to encourage ET3 model participants to partner with other payors, including state Medicaid agencies to provide the benefit of the program to those not receiving Medicare fee-for-service benefits. CMS anticipates releasing a Request for Applications (“RFA”) in Summer 2019 to solicit Medicare-enrolled ambulance suppliers and providers.  Following the RFA, in Fall 2019, a Notice of Funding Opportunity (“NOFO”) will be issued as a tool to implement the triage lines for low-acuity 911 calls. This NOFO will be available to local governments, their designees, or other entities that operate or have authority over one or more 911 dispatches in geographic locations where ambulance suppliers and providers have been selected to participate. It is anticipated that there may be up to three rounds of RFAs/NOFOs issued to stagger start dates and allow for any improvements in the ET3 model. The anticipated start date for the first participants is January, 2020.

This change in payment structure signals that CMS is recognizing alternative models of patient care, including telemedicine, as it explores ways to decrease unnecessary costs while maintaining the quality of care offered to the patient.

CONSIDERATIONS FOR THE HEALTH CARE PROVIDER IN A PRIVATE EQUITY DEAL

by Glenn P. Prives

As private equity investors continue to survey the market for health care deals, providers who were uncertain about their strategic plans or who had no plans are finding partners out there.  Entering into a private equity transaction may be a once-in-a-career move for a health care provider.  However, it is important for providers to give some thought to what they want to negotiate in such a deal before signing on the dotted line.

Here are some considerations for the health care provider in a private equity deal:

  • Type of Partner:  some private equity firms will be very hands-on managing the health care provider while others will provide capital, but otherwise play the role of passive investors.  Some firms will bring in a very experienced operations team to supplant or support current management.  Which type of partner do you want?
  • Strategic Plan:  some private equity firms may seek to use the platform to add on other providers of a similar nature to the platform provider, while others set their sights on multi-specialty platforms.  What is your strategic plan?
  • Liquidity Event:  the initial liquidity event may be structured to have a cash component and a rollover equity component.  There is no one-size-fits-all split between the two components.  While the firm may make an initial offer on such a split, the target provider needs to consider what split best suits its needs and desires.  That may start a debate amongst the various owners of a provider if the owners are in different stages of their careers.  Early and mid-career partners may want to put more into rollover equity including some, if the deal allows, into a “parent entity” that may have different strategic plans.  Late career partners may want a higher upfront cash liquidity event.
  • Post-Closing Compensation:  compensation post-closing for providers will undoubtedly look different.  Like the liquidity event, there is no one-size-fits-all approach to compensation.  These days, some compensation is likely to be productivity-based, and that is not unique to private equity backed transactions.  Once again, the split between productivity-based compensation and fixed compensation may spark a debate.  Early and mid-career partners may want more productivity-based compensation.  Late career partners may want a higher base salary.
  • Governance:  the platform provider will have representation on the governing board of the management company, but how much representation and voting rights depends upon the particular provider.  “Add on” providers may have to work harder to negotiate for board representation if that is important to the provider.

These are just a few of the considerations for health care providers exploring a private equity deal.  Certainly, there’s much more to be done before a deal can be struck.  It is, therefore, important for a provider to contemplate what is most important to the provider as this may be one of the provider’s biggest strategic moves in his or her career.

Physician Impairment and Burnout: An Alternative Perspective

by John Zen Jackson

Thinking about physician impairment and burnout rarely leads to happy thoughts.  Another side of the topic’s coin, however, can be found.  Nonetheless, the difficulties presented by such matters are appropriate starting points for a blog such as this one. 

Pursuant to the Health Care Professional Responsibility and Reporting Enhancement Act (the “Act”), both health care entities and health care professionals in New Jersey have reporting obligations in the event a practitioner demonstrates impairment that would present danger to a patient or to the public.  Reporting to the New Jersey Board of Medical Examiners of such impairment or unprofessional conduct is codified in N.J.S.A. 45:1-37 and for health care entities in N.J.S.A.  26:2H-12.2b et seq.  Common overlapping regulations are found at N.J.A.C. 13:45E-1 et seq.  Such reporting can lead to an appearance before the Medical Practitioner Review Panel and action by the Board of Medical Examiners.

While the Act does not define “impairment,” the regulations set forth the following: “‘Impairment’ means an inability to function at an acceptable level of competency, or lacking the capacity to continue to practice with the requisite skill, safety and judgment, as a result of alcohol or chemical use, psychiatric or emotional disorder, senility or a disabling physical disorder.”  N.J.A.C. 13:45E-2.1.  Physician impairment can spill over and lead to disruptive behavior, which is itself potentially reportable when it is such that “a prudent health care professional reasonably would believe is likely to adversely affect the ability of another health care professional to safely render patient care for which he or she is responsible.”  Id.  There are judicial decisions in New Jersey upholding hospital privileging action based on disruptive behavior.  Nanavati v. Burdette Tomlin Hospital, 107 N.J 240, 254 (1987); Courtney v. Shore Memorial Hospital, 245 N.J. Super. 138, 140-41 (App. Div. 1990).  The test is not “actual harm to patients” but rather that specific conduct “will probably have an adverse impact on patient care.”

At least since its 2008 Sentinel Event Alert, the potential for “disruptive behavior” adversely affecting patient safety has been the subject of commentary in connection with The Joint Commission’s standards.  But it has also been recognized that disruptive behavior may arise from psychiatric or emotional conditions.  While substance abuse has long been known to lead to disruptive behavior, impaired patterns of professional conduct can also result from stress, burnout, and depression.  See generally Brown, Goske & Johnson, “Beyond Substance Abuse: Stress, Burnout and Depression as Causes of Physician Impairment and Disruptive Behavior,” 6 J. Am. Coll. Radiol. 479 (2009).  The concept that “physician burnout” contributes to physician errors has its critics and challengers.  See, e.g., Lawson, “Burnout is Not Associated with Increased Medical Errors,” 93 Mayo Clinic Proceed. 1683 (2018).

But unquestionably, there is extensive literature concerning physician burnout and possible interventions. See, e.g., West, Dyrbye & Shanafelt, “Physician burnout: contributors, consequences and solutions,” 283 J. Internal Med. 516 (2018); Tawik, Profit, Morgenthaler et al., “Physician Burnout, Well-being, and Work Unit Safety Grades in Relationship to Reported Medical Errors,” 93 Mayo Clinic Proceed. 1571 (2018). This includes greater attention to well-being.  Indeed, reviews of this topic with an emphasis on physician wellness and work-life integration are the focus of a recent issue of MDAdvisor which has a series of six articles dealing with different aspects.  

A definitely more uplifting approach to the issue of physician burnout and impairment with a different vantage point is provided in the March 14, 2019 issue of the New England Journal of Medicine:  Schor, “When Sparks Fly – Or How Birding Beat My Burnout,” 380 N.E.J.M. 997 (2019).  The author is a geriatrics specialist who wrote that the part of him that had “long reveled in making a ‘great diagnosis’” was burning out and depriving him of professional satisfaction because of the felt need to balance professionalism and compassion.  The intellectual high in making an esoteric but lethal diagnosis so to give the physician a great day was repressed in view of what was possibly the worst day for the patient. 

He describes the fortuitous circumstance of discovering birding while having stopped during a bike ride in Sandy Hook, New Jersey.  The generosity of an experienced birder having loaned him the use of his binoculars provided a new vista and set him on a path to diagnose different species of birds and to once again feel the joy of a differential diagnosis that worked out well.  Dr. Schor provides an elegant illustration of this phenomenon:

The least sandpiper and the semipalmated sandpiper are almost identical “peeps,” but for the slightly richer, chocolatey brown back on the former and the darker legs on the latter. Similarly, distinguishing two closely related vasculitides, such as Behçet’s and Buerger’s diseases, depends on the caliber of the blood vessel that’s inflamed. Making such fine distinctions is what birders and diagnosticians have in common.

            Hopefully his suggestions take wing and soar.

DSH UNCOMPENSATED CARE COSTS LITIGATION CONTINUES

by Paul L. Croce

On January 10, 2010, the Centers for Medicare and Medicaid Services (“CMS”) posted answers to frequently asked questions (“FAQ”) regarding disproportionate share hospital (“DSH”) audit reporting requirements on its website. In those FAQs, CMS indicated that revenues received from private insurance companies (FAQ 33) and Medicare (FAQ 34) for Medicaid eligible patients must be deducted from costs when determining “uncompensated care costs.”

As a result of the policies enunciated in these FAQs, a deluge of litigation was commenced. Numerous hospitals asserted challenges, in various courts across the nation, asserting that FAQs 33 and 34 were unlawful amendments to the existing regulations which made no reference to the inclusion of Medicare and private insurance payments in the calculation of uncompensated care costs.  Each court that has addressed the issue has found the FAQs invalid, and issued either preliminary or permanent injunctions prohibiting their enforcement, on the basis that CMS violated the Administrative Procedure Act (“APA”) by failing to properly adopt the policies embodied therein in accordance with the notice and comment provisions of the APA. See Texas Children’s Hospital v. Burwell, 76 F. Supp.3d 224 (D.D.C. 2014); New Hampshire Hospital Ass’n v. Burwell, 2017 WL 822094 (D.N.H. Mar. 2, 2017); Children’s Hosp. of the King’s Daughters, Inc. v. Price, 258 F.Supp.3d 672 (E.D. Va. 2017); Tennessee Hosp. Ass’n v. Price, 2017 WL 2703540 (M.D. Tenn. June 21, 2017); Children’s Health Care v. Centers for Medicare & Medicaid Servs., 2017 WL 366758 (D. Minn. June 26, 2017).

Thereafter, on June 2, 2017, following a notice and comment period, CMS issued a final rule which incorporated the policies enunciated in the previously issued FAQs (the “Final Rule”). The Final Rule provides that uncompensated care costs “[a]re defined as costs net of third-party payments including, but not limited to payments by Medicare and private insurance.” 42 C.F.R § 447.299(c)(10)(i).

The adoption of the Final Rule, however, has not stopped the challenges to CMS’ policy. Since the Final Rule’s adoption, two additional courts have addressed the calculation of uncompensated care costs. These courts not only found that CMS’ failure to follow the notice and comment provisions of the APA made the policies in FAQs 33 and 34 unenforceable, they also held the Final Rule invalid because it contradicts the plain language of the Medicaid statute. See Missouri Hospital Ass’n v. Hargan, 2018 WL 814589 (W.D. Mo. Feb. 9, 2018); Children’s Hosp. Ass’n of Texas v. Azar, 300 F. Supp.3d 190 (D. D.C 2018).  

Both courts looked to the Medicaid statute, which states that DSH payments cannot exceed:

[t]he costs incurred during the year of furnishing hospital services (as determined by the Secretary and net of payments under this subchapter, other than under this section, and by uninsured patients) by the hospital to individuals who either are eligible for medical assistance under the State plan or have no health insurance (or other source of third party coverage) for services provided during the year. 42 U.S.C. § 1396f-5(g)(1)(A).

The courts found that the Medicaid statute’s reference to “payments under this subchapter” was a specific reference to payments made by Medicaid. Because the Medicaid statute makes no reference to subtracting any other payments made on behalf of Medicaid eligible patients (other than payments by uninsured patients) from the total costs incurred, the courts concluded that CMS exceeded its authority in adopting the Final Rule.  Accordingly, the Missouri Hospital Ass’n court enjoined the enforcement of the Final Rule, and the Children’s Hosp. Ass’n of Texas court vacated the Final Rule in its entirety. Missouri Hospital Ass’n, 2018 WL at *10-13; Children’s Hosp. Ass’n of Texas, 300 F. Supp.3d at 205-211. 

In light of these court decisions, as of December 30, 2018, CMS has withdrawn FAQs 33 and 34 and will accept revised DSH audits that cover hospital services furnished before June 2, 2017, when the Final Rule was adopted.  Moreover, CMS has indicated it will not enforce the Final Rule as long as the decision in Children’s Hospital Ass’n of Texas remains in effect.  That decision is currently pending appeal before the United States Court of Appeals for the D.C. Circuit. We will be keeping a close eye on the Children’s Hospital Ass’n of Texas case and will provide an update once a decision is issued.

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