2013 – The Health Law Year in Review

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As 2013 draws to a close, we are pleased to look back on the year that was and highlight some of the key developments in the ever-changing field of health law. While a great deal of attention was focused on the implementation of the Affordable Care Act, 2013 also included a number of significant developments in other areas, including information privacy and security, antitrust, fraud and abuse, and drug safety. We have compiled a list of 10 important issues that affect a broad range of healthcare industry clients. If you would like to learn more about these or other health law issues, please contact any of the attorneys in the Healthcare practice group at Bradley Arant Boult Cummings LLP.

1. HITECH Omnibus Rule

In January, the Department of Health and Human Services (HHS) issued the long-awaited omnibus final rule to modify the Health Insurance Portability and Accountability Act of 1996 (HIPAA) pursuant to the Health Information Technology for Economic and Clinical Health Act (HITECH). The final rule made a number of important changes to the HIPAA rules, including making business associates and their subcontractors directly liable for violations of certain of the HIPAA rules, strengthening the enforcement provisions of HIPAA, modifying the breach notification requirement by creating a presumption that a breach has occurred unless there is a low probability that the information at issue has been compromised, and prohibiting most health plans from using or disclosing genetic information for underwriting purposes. The issuance of the final rule coupled with several high-profile settlements resulted in many healthcare organizations (and their business partners) renewing their focus on HIPAA compliance in 2013. For our comprehensive coverage of the final rule, click here.

2. Physician Payment Sunshine Act Final Rule

The Centers for Medicare & Medicaid Services (CMS) finalized the rule implementing the Physician Payment Sunshine Act on February 1. The final rule requires certain manufacturers of covered drugs, devices, and biological and medical supplies operating in the United States to annually disclose most direct and indirect payments and other “transfers of value” made to physicians and certain teaching hospitals. Applicable manufacturers and applicable group purchasing organizations also must report ownership or investment interests held by physicians or immediate family members of physicians. Payments subject to reporting include research-related payments, consulting fees, honoraria, faculty and speaker compensation, grants, gifts, entertainment, food, travel, charitable contributions, royalties or licenses, current or prospective ownership or investment interests, and any other nature of payment or transfer of value. Failure to report may result in civil monetary penalties. Click here for further detail regarding the final rule.

3. Key Antitrust Developments

The Federal Trade Commission (FTC) continued its aggressive enforcement against provider mergers it believed to be anticompetitive, expanding beyond hospital transactions to challenges to mergers and acquisitions of physician practices. In February, the FTC prevailed in a significant U.S. Supreme Court case about the state action doctrine as applied to the merger of two hospitals (FTC v. Phoebe Putney Health System, Inc., No. 11-1160, 568 U.S. __ (2013)). The FTC had asserted that the acquisition of Palmyra Park by the Phoebe Putney Health System was essentially a “merger to monopoly and would allow Phoebe Putney to raise prices for general acute-care hospital services charged to commercial health plans, as well as diminish healthcare quality and service.” Click here for our previous coverage of the decision.

In March, the FTC filed a lawsuit against St. Luke’s Health Care System seeking to enjoin the acquisition of Idaho's largest independent multi-specialty physician practice group. The case marks the first time that the FTC has litigated to trial a matter involving a hospital’s acquisition of a physician practice. The case may define how the courts view hospital acquisitions of physician practices for years to come and may signal a renewed retrospective review of healthcare mergers by the FTC. A decision is expected from the court in the first quarter of 2014.

In addition to its law enforcement activities, the FTC issued its first guidance for clinically integrated networks since passage of the Affordable Care Act in February. The advisory opinion was issued in response to a proposal by the Norman Physician Hospital Organization to form a clinically integrated healthcare network. The advisory opinion may be viewed as a road map for successful clinical integration of healthcare providers. For more on the advisory opinion, click here.

4. OIG Special Fraud Alert on Physician-Owned Distributorships

The Office of Inspector General (OIG) published a special fraud alert on March 26 in which it labeled physician-owned distributorships (PODs) “inherently suspect.” The OIG defined PODs as physician-owned entities that derive revenue from selling, designing, or manufacturing medical devices (including surgical implants) or instruments. The special fraud alert follows intense congressional scrutiny of PODs in recent years, which included a June 2011 report in which the Senate Finance Committee suggested that PODs create financial incentives for physicians to make patient treatment decisions based on economic gain. The special fraud alert is notable for its unequivocal suspicion of an entire class of healthcare businesses. The alert has already led to a lawsuit against HHS and the OIG by an implant and device manufacturer alleging that the alert has had a chilling effect on the PODs industry (Reliance Medical Systems, LLC v. HHS, U.S. District Court, Central District of California). For our previous coverage of the special fraud alert, click here.

5. Inpatient Admission Criteria and the “Two Midnight” Rule

In its final Inpatient Prospective Payment System rule for 2014, CMS announced the so-called two midnight rule, whereby payment for Medicare Part A hospital inpatient services generally will be considered appropriate if the admitting physician expects that the beneficiary will require a stay that spans at least two midnights. The two midnight rule will operate as a presumption of medical necessity under which inpatient stays that do not span two midnights will be subject to prepayment review. Although CMS claimed in the final rule that the two midnight requirement merely clarifies existing policies for inpatient admissions, hospitals have objected that the new rule actually extends the generally accepted 24-hour stay standard for inpatient admissions. The American Hospital Association and others have organized a strong backlash against the new requirement, including a legislative proposal (the Two-Midnight Rule Delay Act, H.R. 3698). Opponents of the rule have already succeeded in delaying its enforcement by CMS and recovery auditors. The future of the rule likely will play out well into 2014.

6. Key Stark Law Rulings

The year also brought significant developments in a pair of closely watched cases involving alleged violations of the federal physician self-referral prohibition, commonly known as the Stark Law. On September 30, in U.S. ex rel. Drakeford v. Tuomey Healthcare System, a federal district court in South Carolina ordered that a hospital system pay more than $237 million for violations of the Stark Law and the federal False Claims Act. The order, entered nearly eight years after the case was filed, followed a May 2013 jury verdict finding that Tuomey violated the Stark Law and False Claims Act by entering into part-time employment contracts with a number of physicians that varied with and took into account the volume or value of the physicians’ referrals.

On November 13, in U.S. ex rel. Baklid-Kunz v. Halifax Medical Center, a federal district court in Florida issued an order granting partial summary judgment to the United States in a case concerning whether a hospital’s payment of bonus compensation to employed medical oncologists violated the Stark Law. The court found that the bonus payments, which were made from a pool consisting of the oncology program’s profits and distributed to the physicians in proportion to their personally performed services, took into account the volume or value of referrals by the physicians and therefore failed to meet the requirement of the Stark Law’s bona fide employment exception. For previous coverage regarding these cases, click here.

7. Drug Quality and Security Act

In response to the 2012 fungal meningitis outbreak linked to pharmacy compounding, Congress amended the Federal Food, Drug, and Cosmetic Act with respect to drug compounding and supply chain traceability in November. The objective of the amendments is to replace the inconsistent and fragmented patchwork of state laws with uniform standards for drug distribution safety and provide a system for establishing the pedigree of prescription drugs. Under the Drug Quality and Security Act, compounding pharmacies electing to meet certain uniform national standards for compounding, labeling, and quality assurance reporting may register annually with the Food and Drug Administration (FDA) as “outsourcing facilities” and be subject to FDA inspections and adverse event reporting. The Act also requires HHS to establish national standards for the licensing of wholesale distributors and third-party warehousing and logistics providers within two years and phase in regulatory requirements to facilitate product tracking at the transaction level through the drug supply chain.

8. Mental Health Parity Act Final Rule

In November, CMS joined the IRS and the U.S. Department of Labor in issuing final rules under the Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA). The final rules follow the interim final regulations issued in January 2010, the passage of the Affordable Care Act, and several rounds of interpretive FAQs to clarify obligations on group health insurance issuers and group health plans for placing mental health and substance use disorder benefits in parity with general medical/surgical benefits and to extend the MHPAEA to the individual insurance market. The final rules apply to financial requirements (e.g., copays and deductibles), quantitative treatment limitations (e.g., number of visits and days of coverage), and nonquantitative treatment limitations (e.g., reimbursement rates and medical management standards relating to medical necessity).

In general, the final rules provide that a plan may not impose a financial requirement or quantitative treatment limitation on mental health and substance use disorder benefits in any classification that is more restrictive than the predominant financial requirement or quantitative treatment limitation for substantially all medical/surgical benefits in the same classification. Similarly, a plan may not impose nonquantitative treatment limitations with respect to a mental health and substance use disorder benefit in any classification unless such limitations are comparable to the limitations imposed by the plan for medical/surgical benefits in the same classification. Notably, the final rules eliminated entirely an exception in the interim final regulations that permitted plans to impose nonquantitative treatment limitations to the extent that “recognized clinically appropriate standards of care” may permit a difference. The final rules are effective for plan and policy years beginning on or after July 1, 2014.

9. Insurance Exchanges

Although not a legal issue, the technical difficulties associated with the unveiling of the federal online health insurance marketplace constituted one of the most visible healthcare issues of the year. While recent reports indicate improved performance and rising enrollment, it remains to be seen whether the implementation issues will lead to more significant problems, such as delays in uninsured individuals obtaining health insurance or a reduction in the number of people choosing to purchase health insurance rather than paying the individual mandate tax penalties. The technical issues associated with the launch of the healthcare.gov website also raise the possibility of delays in the implementation of other key components of the Affordable Care Act, such as the (already once delayed) March 31, 2014 deadline for the individual mandate tax penalties. What on the one hand is a limited logistical hiccup in the implementation of a massively complex law, has, on the other hand, generated significant concern and uncertainty regarding healthcare reform.

10. Medicaid Expansion Developments

The Affordable Care Act was designed to require all states to offer Medicaid eligibility to nondisabled, low-income adults up to 138% of the federal poverty level. This new category is commonly referred to as the expansion population. However, in June 2012, the U.S Supreme Court ruled that the federal government cannot penalize states that do not implement the law’s Medicaid expansion provisions with the loss of existing federal Medicaid funding, thereby effectively giving states the option of whether to cover this new category of individuals. Whether or not to cover the expansion population continued to be a contentious policy discussion in many states in 2013. To date, 25 states plus the District of Columbia have opted to provide coverage, while 23 states have not. Two states, Indiana and Pennsylvania, have waiver applications pending with CMS for alternative Medicaid expansion plans. Regardless of whether states choose to offer coverage to the expansion population, the Affordable Care Act will increase the number of individuals, particularly children, who are eligible for Medicaid coverage as a result of several provisions, such as effectively increasing the poverty level thresholds for eligibility, requiring states to cover foster care children until the age of 26, streamlining Medicaid enrollment applications, creating online Medicaid enrollment through the health insurance exchanges, and allowing for hospitals to make presumptive Medicaid eligibility determinations.