March 24, 2017

Healthcare Law Update: March 2017

Holland & Knight Update
Nathan A. Adams IV | Andrew I. Namkung | Ilenna J. Stein


OIG Issues Advisory Opinion Allowing Free or Reduced-Cost Lodging and Meals

By Courtney Groh and Andrew Namkung

On March 3, 2017, the U.S. Department of Health and Human Services' (HHS) Office of Inspector General (OIG) issued Advisory Opinion 17-01 (Opinion) allowing an academic medical center's (Requestor's) proposal to provide free or reduced-cost lodging and meals to qualifying financially needy patients (Program). The Opinion is the first advisory opinion to expound upon the so-called "Promotes Access to Care" exception (Exception) under the OIG's Dec. 7, 2017, Final Rule.

Specifically, the Requestor proposed to provide up to three nights of free or reduced-cost hotel lodging and a hospital cafeteria meal allowance for patients who satisfy the following criteria: 1) the patient resides more than 90 miles from the hospital in a medically underserved or health professional shortage area; 2) the patient's household income does not exceed 500 percent of the federal poverty level; and 3) the patient's hospital appointment is before 10:00 a.m. and/or the patient has a follow-up appointment within 48 hours of an initial treatment. The Requester stated that it would not advertise the Program and would pay the vendor (e.g., the hotel) directly.

Applying a two-prong test, the OIG determined, first, that the Program would promote access to care through the removal of socioeconomic and geographic barriers that could prevent patients from receiving treatment. Second, the OIG concluded that the Program posed a low risk of harm to patients and federal healthcare programs for the following reasons: 1) the Program is unlikely to interfere with clinical decision-making, as eligibility for the Program is not dependent on the receipt of any particular service and clinicians are not compensated for referring patients to the hospital; 2) there is no risk of increased federal costs (e.g., overutilization), as the arrangement is not advertised and patients are only selected after the treatment is scheduled; and 3) the arrangement does not raise patient safety or quality-of-care concerns, and instead is intended to remove obstacles preventing patients from obtaining necessary treatment.

The OIG also recognized that the arrangement would implicate the Anti-Kickback Statute (AKS). Although the civil monetary penalty (CMP) exceptions do not apply to the AKS, the OIG concluded that, based on the same factors cited in the analysis of the Exception, the Requestor would not be subject to administrative sanctions under the AKS in connection with the arrangement.


Anthem-Cigna Merger Blocked Due to Antitrust Concerns

By Matthew Goldfarb

In United States v. Anthem, Inc., No. 16-1493, 2017 WL 685563 (D. DC. Feb. 21, 2017), the U.S. District Court for the District of Columbia issued an order blocking the proposed merger between Anthem and Cigna. The court held that the U.S. Department of Justice, 11 states and the District of Columbia (together, the Plaintiffs), met their burden of showing that the effect of the merger "may be to substantially lessen competition in the market for sales to national accounts [defined as 'customers with more than 5,000 employees, usually spread over at least two states']." In concluding that the merger would violate federal antitrust laws, the court held that the market for the sale of health insurance to national accounts is a "properly drawn market for purposes of antitrust laws, and that the fourteen states in which Anthem enjoys the exclusive right to compete under the Blue Cross Blue Shield banner, compromise a relevant geographic market for the product." Next, the court held that "plaintiffs established that the high level of concentration in the national accounts market that would result from the merger is "presumptively unlawful under the U.S. Department of Justice and Federal Trade Commission Horizontal Merger Guidelines" and that the merger is likely to have other anticompetitive effects, including: "eliminat[ion] of [Anthem and Cigna's] competition against each other for national accounts, reduc[tion] in the number of national carriers available to respond to solicitations in the future, and diminish[ing] of the prospects for innovation in the market." Anthem filed an Emergency Motion for Expedited Consideration of Appeal with the U.S. Court of Appeals for the District of Columbia Circuit, which was subsequently granted on Feb. 17, 2017.

Market Allocation Agreements Are Not Per Se Antitrust Violations

By Nathan Adams

In Procaps, S.A. v. Patheon, Inc., 845 F. 3d 1072 (11th Cir. 2016), the court of appeals affirmed final summary judgment in the defendant's favor on the grounds that the plaintiff failed to show concerted action as necessary to maintain a Sherman Act Section 1 claim or to adduce concrete evidence of actual anticompetitive effects under a rule of reason analysis. The parties to the lawsuit were joint venturers. Procaps, S.A. (Procaps) designs and manufactures gel capsules in Colombia for delivery of medications. Patheon, Inc. (Patheon) has longstanding relationships with American pharmaceutical companies and a strong marketing operation. In January 2012, the two decided to pool their attributes to create a new, more effective competitor in the American softgel market by entering into a collaboration agreement. In October 2012, Patheon informed Procaps of its planned acquisition of Banner Pharmacaps (Banner), an American designer and manufacturer of gel capsules. Procaps refused to participate in the collaboration any longer and sued Patheon for an antitrust violation. Procaps argued that the collaboration agreement, although lawful at its inception, was transformed into an illegal restraint of trade by Patheon's acquisition of Banner. The court of appeals disagreed on the grounds that Procaps never made a conscious commitment to a common scheme to illegally restrain trade under the collaboration agreement; rather, it quit participating in the agreement, so there was no concerted action under the agreement to restrain trade. The combination with Banner was wholly unilateral by Patheon. Procaps also argued that the court supply apply a per se rule and condemn the post-acquisition agreement as a horizontal market allocation agreement between competitors, but the court of appeals ruled that just because an agreement can be characterized as a market allocation agreement does not mean that the per se rule applies. Under the rule of reason analysis, Procaps failed to show any actual evidence of a reduction in output, increase in price or deterioration in quality.

Deceptive Trade Practices

New York Hospital States DTPA Claim against Insurer

By Nathan Adams

In Icahn Sch. of Med. At Mt. Sinai v. Health Care Serv. Corp., No. 16-cv-8756 (JSR), 2017 WL 635648 (S.D. N.Y. Feb. 15, 2017), the court granted an insurer's motion to dismiss a hospital's claim for negligent misrepresentation, but denied the motion as to the hospital's claims for violation of New York's deceptive business practice statute, GBL §349, and promissory estoppel. The hospital is "out-of-network" with respect to the insurer. The hospital claims that before treating Health Care Service Corp. (HCSC)-insured patients, it contacts the insurer to verify coverage and determine the methodology that the insurer will utilize to determine the amount that it will pay to the hospital. The hospital then allegedly transmits this information to the insured. The hospital filed suit against the insurer after six occasions in which the insurer allegedly told the hospital that it would reimburse the hospital using a particular rate, but ultimately paid significantly less. As to the deceptive trade practice claim, the insurer alleged that the hospital failed to show "consumer-oriented conduct" by the hospital or that the challenged acts or practices have a broader impact on consumers at large. Although acknowledging that the hospital is not itself a consumer, the court rejected the insurer's argument because the hospital transmitted the insurer's alleged misrepresentations to patients during pretreatment consultation so that they could make an informed decision whether to proceed with treatment. The court also disagreed with the insurer that the hospital failed to show a false representation or reasonable reliance as necessary to state a claim for promissory estoppel. But the court did find that the hospital failed to allege facts showing that the insurer had a duty, as a result of a special relationship, to give correct information to the hospital, as necessary to prove negligent misrepresentation.

Regulation and Legislation

OIG Encouraged to Develop New AKS Safe Harbors to Protect Value-Based Arrangements

By David Glynn and Ilenna Stein

The HHS OIG issued its annual solicitation for recommendations for new or modified AKS safe harbors on Dec. 28, 2016. The responses, which were due at the end of February 2017, included a number of proposals by industry groups and manufacturers to implement new safe harbors, or to revise existing ones, to protect so-called value-based or outcome-based pricing arrangements in the pharmaceutical and medical device supply chain. Value-based pricing involves linking payment for a drug or device to patient outcomes and cost-effectiveness, rather than pricing based solely on the volume of sales.

Early in 2016, CMS recognized that value-based pricing should play a role in future drug and device reimbursement when CMS issued its proposed rule on revisions to the Medicare Part B Drug Payment Model, including measures for implementing "value-based tools" to manage reimbursement costs. See 81 Fed. Reg. 13230 (March 11, 2016). Among these tools, CMS explored the use of outcome-based risk-sharing agreements that tie the final price of a drug to results achieved by specific patients in lieu of setting a predetermined price based on historical population data. Under the new approach, manufacturers would agree to provide rebates, refunds or price adjustments if the product does not meet targeted outcomes. Id. at 13244. But a question remains as to how, and whether, these types of arrangements can be structured to comply with federal fraud and abuse statutes, including the AKS, under which even typical volume-based discounting arrangements could technically draw scrutiny if they do not squarely fall within the discount safe harbor.

Commenters urged the OIG to promulgate new stand-alone safe harbors to protect value-based arrangements, so as to encourage, rather than thwart, their development. Moreover, commenters argued that value-based arrangements satisfy factors about which the OIG has historically been concerned, such as promoting access to and quality of care, lowering healthcare costs by aligning financial incentives and fostering competition between manufacturers to innovate the most efficacious products. Recognizing that value-based arrangements may not fit squarely within existing safe harbors, some commenters encouraged expanding existing safe harbors to protect value-based arrangements by, for example, modifying the discount safe harbor to protect arrangements in which a quality or outcome-based discount is offered on a bundle of items and services, or to protect discounts offered in connection with warranties or services provided under a personal or management services contract. They also encouraged the OIG to expand the warranty safe harbor, which currently may only protect product defects, rather than a product's failure to achieve a desired clinical outcome.

While an arrangement is not per se illegal if it does not strictly comply with the requirements of a safe harbor, not having safe harbor protection for value-based arrangements increases the legal and regulatory risk that manufacturers face, thereby limiting their willingness to enter into such arrangements. The industry responded to the OIG's solicitation with a clear and unified message that today's rapidly changing healthcare landscape warrants additional guidance and clarity around value-based arrangements.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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