July 9, 2019

Healthcare Law Update: July 2019

Holland & Knight Update
Charles A. Weiss | Nathan A. Adams IV | Kayla Leland Pragid

CMS Regulation

District Court Strikes Down Rule Mandating Price Disclosure in DTC Pharmaceutical Advertisements

Charles A. Weiss

The U.S. Department of Health and Human Services (HHS), together with the Centers for Medicare & Medicaid Services (CMS), in May 2019 published a final rule requiring direct-to-consumer (DTC) television ads for prescription drugs to include a statement of the products' wholesale acquisition cost (WAC) in a specified format: "The list price for a [30-day supply of][typical course of treatment with][name of product] is [list price]. If you have health insurance that covers drugs, your cost may be different." The statement is not required if the disclosed WAC would be less than $35, or if the product is ineligible for Medicare/Medicaid reimbursement. Few (if any) drugs advertised on television would not be covered by the rule.

In June 2019, a group of industry participants filed suit against HHS and CMS in the District of Columbia, challenging the legality of the rule and seeking a stay of its mandate pending full resolution on the merits. They challenged the rule on two grounds: (1) The rule exceeds the agencies' authority under the Social Security Act, and (2) the rule violates the First Amendment as impermissible compelled speech. Moreover, they argued that the rule compels a false statement because a product's WAC is not a "list price" that translates into what patients — even uninsured patients — pay at the pharmacy counter.

In support of their first argument, the plaintiffs presented declarations from professors at the Kellogg School of Management at Northwestern University and the Yale School of Management which argued that when HHS formally announced in May 2018 that it was considering price disclosure requirements for DTC ads, HHS stated that it would look to the Food and Drug Administration (FDA) to consider inclusion of prices. However, the FDA has in the past taken the position that its enabling statute, the Food, Drug, and Cosmetic (FD&C) Act, does not authorize it to require price disclosure. Whether driven by the FDA's historical position regarding the scope of its own authority or for other reasons, the government instead based the DTC rule on CMS' general authority to promulgate regulations to promote the "efficient administration" of Medicare and Medicaid. The plaintiffs argued this foundation is too weak.

Most discussion of the DTC rule has concerned the plaintiffs' second argument that it amounts to "compelled speech" in the commercial context. The government argued for review under the relatively deferential Zauderer standard, after a 1985 Supreme Court case holding that a state could require certain fee disclosures in attorney advertising. In general terms, Zauderer provides that mandated disclosure of "purely factual and uncontroversial information" concerning issues such as price does not run afoul of the First Amendment so long as the requirements are not "unjustified" or "unduly burdensome." The plaintiffs disputed the government's reliance on Zauderer, arguing that the WAC price is not the price at which drugs are sold at retail, and is essentially unrelated to the price paid by the vast majority of consumers.

Rather than the deferential Zauderer standard, the plaintiffs relied on the familiar Central Hudson test after a 1980 Supreme Court decision that invalidated a ban on utility companies' promotion of electricity usage (intended to support conservation efforts in the 1970s), which generally applies to regulation of commercial speech. To pass muster under the Central Hudson standard, regulation of commercial speech must (i) directly advance a substantial government interest, and (ii) be narrowly tailored to achieve it. Here, the challengers argued that the rule will neither provide meaningful price information to consumers (because of the mismatch between WAC and the actual price paid at the pharmacy counter, especially for patients with insurance), nor will it rein in drugs costs borne by the Medicare and Medicaid programs. Moreover, the plaintiffs stated that there are other and better ways to communicate to patients what their actual costs are likely to be for the advertised drugs.

The government's opposition brief played into certain of the plaintiffs' arguments by defending the propriety of embarrassing pharmaceutical companies through compelling disclosure of oftentimes eye-popping WAC prices. For example, the government wrote that if manufacturers "are embarrassed by their excessive prices and thus lower them," that is an objective of the rule and is achieved in a constitutional manner. Similarly, said the government, by "increasing price transparency and exposing overly costly drugs to public scrutiny, the DTC rule helps to incentivize the manufacturers to reduce their list prices." In addressing the public interest, the government contended that the rule "will play an important role in combatting out-of-control prescription drug prices that are threatening the long-term viability of Medicare and Medicaid and that are unfairly draining the bank accounts of more Americans every day."

The plaintiffs' reply brief made the point that the government's brief showed that the DTC rule is more about grandstanding and scoring political points than providing consumers with actionable information about the likely out-of-pocket cost of a prescription for a drug they see advertised on television. They wrote that "HHS candidly admits that one of the Rule's key 'objectives' is to shock consumers and 'embarrass[]' manufacturers. It is designed to increase 'public scrutiny' on manufacturers by forcing them to display a 'list' price that is worlds apart from the actual price for most of the intended audience of consumers."

At oral argument on July 2, 2019, the court closely questioned both sides and inquired if it might finally resolve the case on the merits instead of ruling only on the plaintiffs' application for a stay. The court ruled in favor of the plaintiffs on July 8, striking down the rule on the eve of its effective date on statutory grounds while avoiding the First Amendment issues under the doctrine of "constitutional avoidance." Specifically, the court held that the Social Security Act's general grant of rulemaking authority to promulgate regulations necessary to "administration" of the Medicare and Medicaid programs did not suggest that Congress intended to authorize HHS and CMS to make rules directly regulating the conduct of "market actors that are not direct participants in the Medicare or Medicaid Programs" and that:

Pharmaceutical manufacturers are not health care providers, private plan carriers, or beneficiaries—each of whom plays a direct role in the public health insurance programs. They do not receive payment for their products from CMS. Their pricing decisions, of course, affect the cost of pharmaceutical benefits offered under the Medicare and Medicaid programs. But those decisions impact program costs in an indirect way. The plain statutory text simply does not support the notion—at least not in a way that is textually self-evident—that Congress intended for the Secretary to possess the far-reaching power to regulate the marketing of prescription drugs.

Elaborating on its reasoning, the court reviewed a number of provisions of the Social Security Act and noted the difference in scope between regulating program participants and reaching more broadly to the overall healthcare market:

What these provisions have in common is this: each contains a congressional directive that concerns the day-to-day running and operation of Medicare and Medicaid as public health insurance programs, and each is directed in some way to a program participant or the program itself. None authorize HHS, in the name of attempting to reduce the costs, to regulate the health care market itself or market actors that are not direct participants in the insurance programs.

The court also pointed to the absence of authority in the FD&C Act to promulgate rules mandating price disclosure, despite the comprehensive regulation of pharmaceutical advertising otherwise provided for therein: "Congress deliberately and precisely legislated in the area of drug marketing under the [FD&C Act]. Such purposeful action demonstrates that Congress knows how to speak on that subject when it wants to."

Having found that HHS lacked authority to promulgate the rule, the district court did not have to reach the First Amendment challenge or resolve other points of contention raised in the parties' respective submissions. The district court entered final judgment on the merits in favor of the plaintiffs. Accordingly, the government's next step, if it still wishes to defend the rule, will be to appeal or seek and receive express authority from Congress.


Bundled Medicare Items or Services Tainted by Kickback May Trigger FCA Liability

Kayla L. Pragid

In United States ex rel. Simpson v. Bayer Corp., No. 05-3895, 2019 WL 1772560 (D.N.J. Ap. 23, 2019), the district court determined that any item in a bundled Medicare claim that is tainted by a kickback or violation of any Medicare laws, regulations or program instructions could trigger liability under the False Claims Act (FCA) even where the government did not pay more for the claim based on the patient's receipt of the particular item or service.

The relator brought a qui tam action under the FCA whistleblower provision, alleging: (1) Bayer pharmaceuticals caused hospitals to submit false claims by improperly marketing off-label uses of Trasylol (a drug that was sometimes used to reduce bleeding during surgery) for uses that were not reasonable and necessary under Medicare's guidelines; and (2) Bayer paid illegal kickbacks to physicians to induce them into using the drug for the off-label purposes. In response, Bayer argued that, even if the hospital's use of Trasylol was not reasonable or necessary or the hospital over-utilized Trasylol due to illegal kickbacks, the Medicare claims were not false under the FCA as a matter of law because Trasylol was "bundled" with all other surgical expenses, rather than itemized on the bill such that the fixed cost claim amounts for the surgeries did not change based on whether Trasylol was or was not administered.

The court rejected Bayer's argument, emphasizing the difference between factual and legal falsities in the FCA context. A claim is factually false when the claimant misrepresents the goods or services it provided to the government. A claim is legally false when the claimant misrepresents (or misleadingly omits) "its compliance with a statutory, regulatory, or contractual requirement[s]." The relator contended the at-issue claims were legally false because the hospitals made express certifications to Medicare by signing certain standard Medicare forms — a Medicare Enrollment Application (form CMS-855A) and Medicare annual reports (form CMS-2552) — that were false. The Medicare Enrollment Application includes the following certification:

I agree to abide by the Medicare laws, regulations and program instructions. ... I understand that payment of a claim by Medicare is conditioned upon the claim and the underlying transaction complying with such laws, regulations, and program instructions (including, but not limited to, the Federal anti-kickback statute ...

Likewise, hospitals' annual reports to Medicare (form CMS-2552) include an acknowledgement that:


The court held these certifications of compliance with the Anti-Kickback Statute (AKS) were false, as a matter of law, if the bundled claims submitted to Medicare included any items or services that resulted from an unlawful kickback. The court reasoned that "Congress expressly made AKS violations actionable under the FCA ... to strengthen whistleblower actions based on medical care kickbacks and to ensure that all claims resulting from illegal kickbacks are considered false claims for the purpose of civil action[s] under the FCA." Furthermore, even where a noncompliant claim did not cost the government more than a compliant claim, that payment of such a claim "does not mean the Government is indifferent to underlying compliance violations" because "[t]he Government does not get what it bargained for when a defendant is paid ... for services tainted by a kickback."

For these reasons, the court denied Bayer's motion for summary judgment and held that Bayer may be liable under the FCA for Medicare claims it submitted for surgical procedures in which the drug Trasylol was administered "regardless of whether the relevant requests for reimbursement were bundled rather than itemized, and regardless of whether the administration of Trasylol in these procedures affected the total amount of corresponding reimbursement."

Missing Hospice Certifications Were Material Grounds for FCA Violations

Nathan A. Adams IV

In United States ex rel. Lemon v. Nurses to Go Inc., No. 18-20326, 2019 WL 2004353 (5th Cir. May 7, 2019), the court of appeals reversed the district court's conclusion that the relators had alleged mere "laziness, bungled paperwork and mistakes that were corrected" on the part of several hospice organizations not material to Medicare reimbursement and, thus, not in violation of the FCA. The relators, former employees, alleged that the defendants failed to complete and maintain certifications and recertification for hospice patients; failed to complete and maintain physician narratives in support of certifications for hospice patients; allowed nonmedical personnel to complete certifications for hospice patients; allowed nonmedical personnel to complete physician narratives for hospice patients; failed to have required face-to-face encounters between physicians and patients; permitted nurses to conduct required face-to-face encounters with hospice patients instead of a physician or nurse practitioner; completed certifications after the time period required for completion; failed to write individualized plans of care; and billed for and provided services to deceased patients. The court observed that section 1395f(a)(7) of the Medicare statute lists a number of certifications that are "conditions of ... payment for" hospice services, and that "payment for services furnished" may be made "only if" the certification, face-to-face encounter and plan-of-care requirements are made. In addition, Medicare regulations for hospice services state that "to be covered," certifications regarding terminal illness must be completed. Therefore, the court found that defendants' alleged conduct violated conditions of payment and, as evidence that the government would deny payment if it knew of the defendants' false certifications, found that the HHS Office of Inspector General has previously taken enforcement action against hospice providers that have submitted bills for ineligible patients. Last, the court determined that the violations, as alleged, were not minor even though defendants argued that they billed for what they did and did not commit fraud.

Non-Owners of Company That Presents Fraudulent Claims May Still Be Liable Under FCA

Nathan A. Adams IV

In United States ex rel. Doe v. Heart Solution, P.C., 923 F. 3d 308 (3d Cir. 2019), the court of appeals ruled that individual employees with no ownership interest in a company that presents a fraudulent claim can still be liable under the FCA. The Patels, a husband and wife duo, pled guilty to separate but nearly identical criminal information charges for defrauding Medicare. The Patels falsely represented to Medicare that neurological testing was being supervised by a licensed neurologist. Ms. Patel argued that because she did not have any ownership interest in Mr. Patel's healthcare company, she had no duty to ensure that it employed a supervising neurologist. The court disagreed, holding that an ownership interest is not required for FCA liability. Collateral estoppel was another issue in the case. The court ruled that the defendant's healthcare company could not be collaterally estopped, based on a Medicare fraud conviction and plea colloquy, from contesting FCA liability or damages where the company was not charged with healthcare fraud, and its role in defrauding Medicare by submitting false reports about neurological testing was not actually litigated or determined by a final judgment in the criminal proceeding. In addition, Ms. Patel's admission that she submitted false claims to Medicare about the neurological testing at her husband's healthcare company, and that her husband's company and her company were paid roughly $1.18 million from Medicare for unsupervised neurological testing, did not collaterally estop her from denying liability or damages with regard to the government's common law claims for unjust enrichment, disgorgement of profits and payment by mistake of fact because the admissions left open the possibility that the defendant's husband and his company retained the entire benefit of the fraud. She was collaterally estopped from denying the falsity and knowledge elements of the government's FCA claims. The court would not allow Mr. Patel's unsworn statement that his company employed a supervising neurologist during certain years to create an issue of fact on summary judgment.

Billing for Absent Teaching Physician in Surgery Was Material Ground for FCA Violation

Nathan A. Adams IV

In United States ex rel. Wollman v. General Hosp. Corp., No. 1:15-cv-11890-ADB, 2019 WL 2501669 (D. Mass. June 17, 2019), the district court ruled that a relator's claims that a hospital wrongly billed the government for time patients spent in surgery without a teaching physician immediately available in the room were not "minor or insubstantial" billing rules, and, although "they may not be among the most central to the Medicare and Medicaid programs overall, they are sufficiently central to the payment scheme for concurrent and overlapping surgeries to have received congressional attention and expressions of concern over noncompliance." Specifically, the relator, a former treating anesthesiologist at the defendant hospital, alleged that teaching surgeons routinely left patients who were undergoing surgery alone with residents and fellows in order to conduct concurrently scheduled surgeries, and that they did so without identifying another qualified teaching physician who would be immediately available in the event of an emergency and without keeping proper records or obtaining the patients' informed consent. The relator also claimed that the practice resulted in patients being under anesthesia for extended, medically unnecessary periods. To receive Medicare payments for services performed by a teaching physician, the services must either be "personally furnished by a physician who is not a resident," or "furnished by a resident in the presence of a teaching physician," except in certain specified situations. 42 C.F.R. §§415.170, 415.172. When a teaching physician is not present during portions of the procedure that are not critical or key and is participating in another surgical procedure, he or she must arrange for another qualified surgeon to immediately assist the resident should the need arise. When submitting a claim for reimbursement, the hospital certifies compliance with these Medicare rules and regulations for payment.


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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