December 19, 2018

Healthcare Law Update: December 2018

Holland & Knight Update
Nathan A. Adams IV | Sara M. Klock | Benjamin T. Tso | Melissa A. Wong


OIG Issues Advisory Opinion Addressing Eligible Managed Care Organizations' Safe Harbor

By Benjamin T. Tso

On Oct. 11, 2018, the Office of Inspector General (OIG) for the U.S. Department of Health and Human Services (HHS) issued OIG Advisory Opinion No. 18-11, in which the OIG addressed whether a health plan's proposal to incentivize Early and Periodic Screening, Diagnostic and Treatment (EPSDT) services qualified under the Eligible Managed Care Organization (EMCO) safe harbor. The EMCO safe harbor was issued in interim final form in late 1999. Since then, this is the first time that the OIG has issued an advisory opinion applying the EMCO safe harbor to address lingering questions about its breadth.

Advisory Opinion No. 18-11 involved a Medicaid managed care organization's (MCO) proposal to pay contracted providers and clinics (network providers). The amount paid to network providers depended on the amount of EPSDT services provided to enrolled Medicaid beneficiaries (enrollees). Network providers qualified for different levels of bonus payments, depending upon their increase in EPSDT services. The OIG explained that the proposed arrangement implicated the Anti-Kickback Statute (AKS) because the arrangement involved paying remuneration in exchange for the referral or increase of healthcare services payable in part by a federal healthcare program.

The OIG applied a three-prong analysis to determine if the MCO qualified under the EMCO safe harbor. The first prong assesses whether the entities in question qualify as an "eligible managed care organization" and "first tier contractor." The OIG found that a full-risk capitated contract between the MCO and Medicaid qualified the MCO as an "eligible managed care organization." Likewise, the network providers qualified as "first tier contractors" as a result of their contract with the MCO to provide items and services. The second prong looks at whether the payments in question provide or arrange for items or services. The OIG found that the EPSDT services qualified as healthcare services because Medicaid required the MCO to provide such services under contract. The last prong looks at whether the proposal meets the definition of arrangements under the EMCO safe harbor. Applying a three-part test, the OIG confirmed the applicability of the EMCO safe harbor.

The first criteria requires that an agreement be written and signed by the parties, specify the items and services covered and be for a period of at least one year. The agreement cannot claim payment either directly or indirectly from a federal healthcare program for the services covered. The MCO certified that it met these requirements and would be financially responsible for the cost of providing the EPSDT services, satisfying the first criteria. The second criteria requires that neither party give nor receive remuneration in return for, or to induce, the provision or acceptance of business (other than business covered by the agreement) for which payment is made in whole or in part by a federal healthcare program on a fee-for-service or cost basis. The OIG found that the proposed arrangement limited the incentive payments to the EPSDT services. Furthermore, the incentive payments would not apply to other lines of federal healthcare program business, satisfying the second criteria. Lastly, the safe harbor requires that neither party to the agreement be able to shift the financial burden of the agreement to the extent that increased payments are claimed from a federal healthcare program. The MCO met the last criteria because Medicaid paid the MCO a capitated payment as payment in full. Although the increase in EPSDT services could cause the MCO's capitated payment rates to increase, the OIG found that it would be consistent with the government's goal of diagnosis and treatment as early as possible.

FDA's 510(k) Modernization Efforts — Safety and Performance Based Pathway

By Sara M. Klock, Jennifer M. Nowak and Ethan Jorgensen-Earp

On Nov. 26, 2018, the U.S. Food and Drug Administration (FDA) Commissioner and Director for the Center for Devices and Radiological Health (CDRH) announced FDA's plan to "modernize the FDA's 510(k) clearance pathway." The FDA calls its modernized approach the "Safety and Performance Based Pathway."

The FDA classifies devices into three classes — Class I, Class II and Class III — based on the level of control necessary to assure safety and effectiveness. A sponsor wishing to bring a medical device to market must first classify the device based on its intended use and indications for use, which are conveyed in product labeling and sponsor communications. Class II devices are "moderate risk" devices, which generally require sponsors to obtain "premarket clearance" by submitting a 510(k) application to the FDA demonstrating the proposed device is substantially equivalent to a predicate device.1 The FDA will find a device to be substantially equivalent if, in comparison to a predicate, it has the same intended use as the predicate, and meets the following requirements:

  1. has the same technological characteristics as the predicate, or
  2. has different technological characteristics, and
  3. does not raise different questions of safety and effectiveness, and
  4. the information submitted to the FDA demonstrates that the device is at least as safe and effective as the legally marketed device2

The FDA's data indicates that "nearly 20 percent of current 510(k)s are cleared based on a predicate that's more than 10 years old," and while that does not necessarily mean the predicate is unsafe, it does demonstrate that "some devices may not be continually improving, which is the hallmark of health technologies." The agency's goal is to push sponsors to stop or limit their reliance on predicates that are outdated and may lack modern performance characteristics, and rely instead on more modern predicates, which will allow the FDA to approach 510(k) submissions on a contemporary baseline that "looks to the future and ... can be updated as technologies advance," rather than relying on older technology as the precedent. The Safety and Performance Based Pathway, as the FDA explains, is aimed at creating greater market competition, while at the same time "is a direct and transparent approach to demonstrating the safety and effectiveness of low to moderate risk devices." Furthermore, this updated pathway would "provide more direct evidence of the safety and performance of a device and better information for patients and providers to make well informed health care decisions," by encouraging sponsors to rely on modern objective safety and performance criteria to demonstrate substantial equivalence.

The FDA is using the 10-year look-back as a starting point, and it plans to seek public feedback on this timeframe and whether the agency should take other actions to advance the use of modern predicates. The FDA plans to publish a list of devices demonstrating substantial equivalence to older predicates against the wishes of the medical device industry. Furthermore, the FDA plans to develop policy to actively sunset older predicates and require the use of newer predicates. To do this, the FDA acknowledges it may need congressional approval or guidance.

As a result of its modernization efforts, the FDA notes that it believes more sponsors will obtain premarket clearance through the De Novo pathway, which is reserved for those low- to moderate-risk devices that do not have an appropriate predicate device. Although the FDA did not elaborate on its reasoning, this would be a likely result if the use of outdated predicate devices is limited. The FDA published a Notice of Proposed Rulemaking on Dec. 7, 2018, clarifying the De Novo classification process and criteria.

The FDA's announcement is another step in the agency's push to modernize and stay current on medical device technology to maintain the agency's "global gold standards for safety and effectiveness." We expect to see this movement continue as the FDA issues additional regulation and guidance related to these policies and other modernization efforts.

Recent Medicare Advantage and Part D Proposed Rules: Four Things to Watch

By Melissa A. Wong

The Centers for Medicare & Medicaid Services (CMS) issued two Medicare Advantage (MA) and Part D proposed rules last month that, if enacted, could significantly impact current benefit designs and operations for both programs. In the last few remaining weeks of the required comment periods for these proposals, MA organizations and Part D sponsors should review and consider potential business implications posed by the following four proposed initiatives in particular:

  1. Additional Telehealth Benefits. CMS would allow MA organizations to provide their enrollees additional telehealth benefits that exceed what is offered under traditional Medicare, and to allow organizations to treat such services as "basic benefits" for the purposes of bid submission and payment by CMS. MA organizations would be given discretion to determine independently from CMS which services would be clinically appropriate to furnish under a telehealth benefit in a given year. MA enrollees must still be allowed access to these services through an in-person visit, and not only as a telehealth benefit, based on the enrollee's preference. Under the proposed rule, MA organizations may only furnish telehealth benefits through the use of contracted providers, and must conduct appropriate provider credentialing and monitoring, including appropriate oversight to ensure that telehealth providers comply with applicable state licensing and other laws governing telehealth services. MA plans could still offer supplemental benefits to provide coverage for telehealth services that would not be covered under traditional Medicare or that do not otherwise meet the requirements for classification as an additional telehealth benefit.
  2. New Preclusion List Requirements. CMS announced that it would no longer require MA providers and Part D prescribers to enroll with the Medicare fee-for-service program. Instead, CMS is installing a "preclusion list" to identify "demonstrably problematic" providers and suppliers, so that payment for any items or services prescribed or furnished by precluded providers or prescribers under MA or Part D respectively would be rejected or denied. This would include providers that are currently revoked from Medicare, are under an active re-enrollment bar, or have engaged in behavior for which CMS could have revoked the provider's enrollment if they had in fact been enrolled. The latest proposed rule seeks to implement many clarifying and technical changes, as well as a proposed consolidation of the Medicare enrollment revocation and preclusion list appeals processes so that they run concurrently, which in turn allows CMS to place providers on the preclusion list months earlier than if such processes were to run consecutively. While the preclusion list goes into effect on Jan. 1, 2019, CMS is allowing MA organizations and Part D sponsors to delay payment denials and claims rejections associated with precluded providers until April 1, 2019, in order to provide enrollees sufficient notification of a precluded provider or prescriber and an opportunity to make other arrangements.
  3. Less Protection for Protected Classes. Part D sponsors are required to include on their plan formularies of all drugs in six protected classes, specifically antidepressants, antipsychotics, immunosuppressants (for treating organ transplant rejection), antiretrovirals and antineoplastics. CMS, however, proposes to allow broader use of prior authorization and step therapy for protected class drugs, including to determine use for protected class indications or to exclude from formularies protected class drugs for non-protected class indications. In addition, CMS would allow Part D sponsors to exclude from formulary coverage drugs that are only a new formulation of an existing, single-source drug or biological. Third, Part D sponsors would be allowed to exclude a protected class drug if the price of the drug increased beyond the rate of inflation over a specified look-back period. CMS' last major attempt to scale back protections for protected class drugs in 2014 was met with significant opposition, and its proposed rule was never finalized. This proposal will likely again generate opposition.
  4. Pharmacy Price Concessions. For several years, CMS has expressed concern that enrollees do not benefit from reduced cost-sharing when certain discounts and price concessions that serve to lower the cost of a drug are not factored into the price of that drug at the point of sale. To recognize these price concessions up front rather than as direct and indirect remuneration (DIR), CMS proposes to require that all price concessions from network pharmacies be reflected in the "negotiated price" that is made available at the point of sale. Currently, Part D sponsors must only recognize as part of negotiated price those price concessions that can be reasonably determined at the point of sale. CMS recognizes that many of the pharmacy price concessions are contingent upon pharmacy performance, and therefore cannot necessarily be determined at the point of sale. To account for this, CMS proposes that the negotiated price must reflect the "lowest possible reimbursement that a network pharmacy could receive from a particular Part D sponsor for a covered Part D drug," but that these prices could then exclude any additional contingent amounts that could flow to network pharmacies, such as incentive fees or performance-based payment arrangements. Those additional contingent amounts would then be reported as negative DIR as part of the annual report filed after the end of the plan year. Many industry observers expect operational difficulties and significant pushback to this proposal.


Nurse Administrator's Conviction and Enhanced Sentencing Under AKS Affirmed

By Kaitlyn Cawley

In United States of Am. v. McCardell, No. 17-30919, 2018 WL 4697252 (5th Cir. 2018), the court of appeals affirmed the conviction and enhanced sentencing under U.S.S.G §2B41 of registered nurse administrator Thomas McCardell for Physicians Behavioral Health (PBH) under the AKS. McCardell paid an individual, Gloria Himmons, to refer patients to PBH through the guise of employing Himmons' son as a community educator. Because Himmons was already referring patients to another hospital in Florida, Himmons agreed that all payments should be made through her son. After Himmons was charged for violating the AKS in relation to her dealings with the hospital, she cooperated with authorities to provide evidence to charge McCardell. A jury determined McCardell was guilty. The lower court exercised its discretion to depart from the applicable guideline ranges to enhance the sentence based upon the amount of improper benefit conferred, rather than the amount of the bribe.

Among other arguments, McCardell asserted that the lower court's conviction was not supported by sufficient evidence because McCardell did not knowingly or willfully make payments to Himmons with specific intent to violate the AKS, and because McCardell attempted to comply with the safe harbor provision of personal services and management contracts by entering into the contract with Himmons' son. The court found McCardell's arguments unconvincing. The court relied on the fact that McCardell agreed to abide by PBH's employee handbook, which specifically prohibited McCardell from offering kickbacks. Furthermore, the court reasoned that McCardell's contract with Himmons' son lacked an agency agreement set out in writing and signed by the parties (as required under 42 C.F.R. §1001.952(d)(1)) and that the agreement was in reality an agreement between McCardell and Himmons signed by Himmons' son.

Moving to sentencing, McCardell argued that the government bore the burden of proof to show that the sentence was warranted and the value of the bribe should have been used to determine the appropriate increase in the offense level because direct costs were not calculable. The court disagreed, finding that the lower court did not improperly place the burden of proof on McCardell and did not err in determining that the value of the improper benefit to be conferred was the appropriate basis to increase the offense level. The court reasoned that (1) McCardell admitted that he had the burden of proof during the lower court hearing, and that (2) the statement of PBH's owner that he did not have time to calculate all direct costs demonstrated that such costs could have been calculated. The court also ruled that even if it had found that the lower court had erred in its sentencing determination, the error was harmless. The court relied on the fact that the lower court explicitly laid out an alternative ground for its decision as compared to the guideline range based on independent factors.

Court Finds Employee Exemption Applicable in Qui Tam Action Based on FCA and AKS

By Kaitlyn Cawley

In Carrel v. Aids Healthcare Found., Inc., 898 F.3d 1267 (11th Cir. 2018), the court of appeals affirmed the lower court's grant of summary judgment in favor of AIDS Healthcare Foundation for certain claims and dismissal of other claims brought by employees as relators under the False Claims Act (FCA). In this qui tam action, the relators alleged that incentives offered to employees and patients were unlawful kickbacks that rendered false any claims for federal reimbursement. The foundation provided medical services to individuals with HIV/AIDS and offered financial incentives to employees who referred HIV-positive individuals to other clinics and pharmacy services provided by the foundation. The foundation received approximately half of its revenue from Medicare, Medicaid and programs established by the Ryan White Comprehensive AIDS Resources Emergency (CARE) Act. The relators specifically alleged that an HIV-positive patient was assigned to a foundation employee, that the employee referred the patient to a foundation clinic and that the foundation paid the employee for successfully linking the patient to treatment with the foundation. The foundation later told the patient that CARE Act funds were used to pay for the patient's treatment.

The court held that referral payments made to employees fell within the employee exemption of the AKS. The court reasoned that the AKS exempts "any amount paid by an employer to an employee ... for employment in the provision of covered items or services." The AKS also exempts "any payment practice specified by the Secretary [of the Department of Health and Human Services] in regulations." Because the employee worked for the foundation, and the CARE Act covered the referral of HIV-positive individuals to appropriate healthcare providers, the foundation was entitled to pay the employee for referring patients. The court also held that the relators' other allegations failed to state a claim for lack of particularity. The court opined that the relators offered only circumstances consistent with their allegations that the foundation made false claims. The relators did not put forth evidence supporting a convergence of circumstances in which the foundation violated the AKS and billed the government for the services provided to that patient. The court noted that the relators conceded that they did not know the number of illegally referred patients; instead, the relators relied on general allegations about standard operating procedures at the foundation.

Deceptive Trade Practices Act (DTPA)

DTPA Claim Against Air Ambulance Service Federally Pre-empted

By Nathan A. Adams IV

In Ferrell v. Air Evac EMS, Inc., 900 F.3d 602 (8th Cir. 2018), a patient brought a putative class action in state court against an air ambulance provider, seeking a declaratory judgment that any contract between class members and the provider was unenforceable, damages under the Arkansas Deceptive Trade Practices Act (DTPA) for concealment of price terms for services and a declaratory judgment that the provider could not seek restitution against class members due to unclean hands. The patient had checked into an emergency room at a hospital after experiencing chest pain. Staff arranged for air transport to another hospital 41 miles away. Thereafter, the provider sent the patient a bill for $30,083.26, of which his insurer paid $1,000. Following removal of the case, the district court dismissed all claims as pre-empted by the Airline Deregulation Act. The court of appeals affirmed. It determined that the Americans with Disabilities Act (ADA) pre-empted the patient's claim that the provider's suppression or omission of whether healthcare insurance would pay for services and how much patients would be charged violated the DTPA because the state law relates to a price, route or service of an air carrier that might provide air transportation. But the court added that its ruling does not leave air ambulance patients without potential, unpre-empted judicial remedies. If the patient does not pay the amount charged and the provider sues, the patient may assert in defense that he did not agree to pay that amount, and no enforceable contract was breached. The provider might then assert an equitable claim to recover for services rendered, but principles of state law may control.


CMS Payment-Deduction Policy Enjoined Until APA Satisfied

By Nathan A. Adams IV

In Tennessee Hosp. Ass'n v. Azar, 908 F. 3d 1029, (6th Cir. 2018), the court of appeals ruled that CMS' payment-deduction policy directing states to deduct Medicare and private-insurance payments when calculating "uncompensated care costs" of serving Medicaid-eligible individuals and determining each hospital's disproportionate share hospital (DSH)-payment limit was a reasonable interpretation of ambiguous language in the Medicaid Act in accord with Chevron deference, despite purported inconsistent interpretations by CMS over time. But the court of appeals also found that CMS' directive was a legislative rule subject to the Administrative Procedure Act's (APA) notice and comment procedures. Consequently, the court of appeals enjoined enforcement of CMS' policy until CMS promulgates it in compliance with the APA process. The court of appeals disagreed with the district court that CMS' policy exceeds the agency's authority under the Medicaid Act. 


1 21 C.F.R. §807.92(a)(3)

2 21 U.S.C. §360c(i)(1)(A) 

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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