Publications

Eighth Circuit Affirms CMS Administrator’s Decision That Missouri Hospital’s Provider Tax Expenses Should Have Been Offset By its State's Pool Arrangement Payments – On September 12, 2012, the Eighth Circuit issued its decision Kindred Hospital East, LLC v. Sebelius, No. 11-3555 (8th Cir.) affirming the District Court’s order upholding the CMS Administrator’s decision that Kindred Hospital - Kansas City and Kindred Hospital - St. Louis (Kindred) should have reduced its provider tax expense by the amount it received from certain privately administered pool funds on its 2000-2003 cost report.  During the relevant time period, Missouri imposed a provider tax on hospitals, referred to as the Federal Reimbursement Allowance Tax (FRA Tax).  The FRA Tax was used by Missouri to generate federal matching Medicaid funds for hospitals.  However, because the FRA Tax was imposed on all hospitals regardless of their Medicaid payor mix, hospitals that treated a large number of Medicaid patients disproportionately benefitted from the Medicaid payments generated by the FRA Tax.  As a result, Missouri hospitals initiated a privately operated pooling system.

Under the pooling system, Missouri hospitals contributed their Medicaid supplemental payments into a single pool.  The private pool administrator was tasked with determining whether a hospital was a “pool recipient” or a “pool contributor.”  Pool recipients consisted of those hospitals whose FRA Tax exceeded their Medicaid supplemental payments.  Pool contributors, on the other hand, were comprised of hospitals whose Medicaid supplemental payments exceeded their FRA Tax. 

Kindred was a pool recipient during for its fiscal years 2000-2003.  On its Medicare cost report for those time periods, Kindred claimed 100 percent of its FRA Tax as an expense.  Kindred did not reduce its FRA Tax expense by the amount of pool payments it received during those fiscal years as a pool recipient.  If Kindred had offset its FRA Tax expense with its pool payments on its fiscal years 2000-2003 cost report, Kindred would have received approximately $3 million less in Medicare payments.  Following the recommendation of the OIG, CMS instructed Kindred to reclassify the pool payments as refunds to be offset against its FRA Tax expense.  Kindred appealed this determination to the PRRB, which issued a decision finding the adjustments inconsistent with the facts, Medicare laws, and program guidance.  The CMS Administrator reversed the PRRB’s decision and reinstated the adjustments.  Kindred appealed the CMS Administrator’s decision to the District Court, which affirmed the CMS Administrator’s decision in all respects.  Kindred then appealed the District Court’s order to the Eight Circuit. 

On appeal, Kindred argued that (i) the pool payments were not “refunds” under 42 C.F.R. § 413.98, (ii) the CMS Administrator inappropriately relied on Provider Reimbursement Manual guidance in making its decision, and (iii) the pool payments were donations or unrestricted grants from one hospital to another.  The Eight Circuit, however, concluded that the CMS Administrator’s decision that Kindred’s FRA Tax should have been offset by its pool payments was supported by substantial evidence.  First, the circuit court found that the CMS Administrator had authority to interpret its regulations and the applicable statute as requiring that the FRA Tax expense be offset by the pool payments—which constituted reductions of Kindred’s reimbursable expenses.  Second, the circuit court determined that, even if the CMS Administrator inappropriately relied on Provider Reimbursement Manual Guidance, the CMS Administrator’s decision “was a reasonable decision based upon its authority under 42 U.S.C. § 1395x that payments from the pool functionally reduce Kindred’s Medicare costs.”  Finally, the circuit court found that there was substantial evidence in the record to support the CMS Administrator’s conclusion that the “pool payments were not donations or unrestricted grants from one hospital to another.”

The Eight Circuit’s decision is available here. 

Reporter, Adam Robison, Houston, +1 713 276 7306, arobison@kslaw.com.

OCR Settles Breach Notification Case with Massachusetts Provider for $1.5 Million – Massachusetts Eye and Ear Infirmary and Massachusetts Eye and Ear Associates, Inc. (collectively, MEEI), a specialty hospital and physician group practice located in the greater Boston area, agreed to pay the U.S. Department of Health and Human Services (HHS) $1.5 million to settle alleged HIPAA violations associated with the theft of an unencrypted personal laptop containing the electronic personal health information (e-PHI) of approximately 3,500 MEEI patients and research subjects.  MEEI did not admit any liability or wrongdoing in connection with the settlement.

The laptop belonged to a physician affiliated with MEEI and was stolen in February 2010 while the physician was lecturing in South Korea.  The information on the laptop included demographic and medical information, but was believed not to include any social security numbers, financial account numbers or credit or debit card numbers.  According to MEEI, there was no indication that the information on the stolen laptop had been accessed or used inappropriately.

MEEI submitted a report of the breach to the HHS Office for Civil Rights (OCR) as required by the HIPAA Breach Notification Rule, which resulted in an OCR investigation into the matter.  OCR’s investigation indicated that MEEI failed to take necessary steps to comply with certain HIPAA Security Rule requirements, such as conducting a thorough risk analysis regarding the confidentiality of e-PHI maintained on portable devices, implementing security measures sufficient to ensure the confidentiality of e-PHI created, maintained and transmitted by MEEI using portable devices, and adopting and implementing policies and procedures to address security incident identification, reporting and response.  According to OCR, these failures continued over an extended period of time and demonstrated a long-term disregard for the Security Rule requirements.   

In addition to the $1.5 million fine, MEEI agreed to implement a corrective action plan (CAP), which includes a commitment to perform a risk assessment, review policies and procedures and provide staff education.  MEEI must designate an individual or entity to monitor its compliance with the CAP. 

MEEI expressed disappointment in the size of the fine in a statement on its website, noting that the independent specialty hospital’s annual revenue is small compared to other larger institutions that received smaller fines. 

For a copy of the Resolution Agreement, please click here.  To read the HHS press release, please click here.  For the MEEI press release, which includes a link to the press release announcing the breach, click here. 

Reporter, Kerrie S. Howze, Atlanta, + 1 404 572 3594, khowze@kslaw.com. 

Documenting Medical Necessity for Major Joint Replacement (Hip and Knee) – Recent Medicare auditing projects have demonstrated very high error rates among claims paid for major joint replacement surgery.  On September 17, 2012, CMS published an article “as an educational guide to improve compliance with documentation requirements for major joint replacement surgery.”  See Documenting Medical Necessity for Major Joint Replacement (Hip and Knee), CMS MLN Matters No. SE1236, September 17, 2012, (MLN Article).  Below are key points from this article. 

To avoid denial of claims, medical records should contain sufficient details “to support the determination that major joint replacement surgery was reasonable and necessary for the patient.”  See MLN Article at 2.  CMS further states that “conclusive statements should be avoided.”  Id.  Accordingly, the medical record must consist of a full description of the historical and clinical findings for each patient. 

Examples may include:

The hospital record for the preoperative joint replacement surgical patient should include:

The chart should also include documentation of specific conditions such as osteoarthritis (include severity); inflammatory arthritis (include type); failure of previous osteotomy; and any specific malignancies.

The hospital record for the postoperative joint replacement surgical patient should include operative report for the procedure, including observed pathology; daily progress notes for inpatients; and discharge plan and discharge orders.

Reporter, Katy Lucas, Atlanta, +1 404 572 2822, klucas@kslaw.com.

King & Spalding Hosts Antitrust Program in Austin, Texas – On September 12, 2012, King & Spalding hosted an antitrust panel discussion regarding Antitrust Enforcement under the Obama Administration in our Austin office.  The panel featured Jeff Perry, who is in charge of the Mergers IV Division (which oversees, among other industries, hospital mergers) at the Federal Trade Commission; William Stallings, the Chief of the Transportation, Energy, and Agriculture Section of the Antirust Division of the Department of Justice; Kim Van Winkle, the Chief of the Antitrust Section of the Texas Attorney General's office; and Jeff Spigel, the head of the King & Spalding Antitrust Practice, and who provided a private practitioner's perspective. 

The panel discussed antitrust enforcement in the past few years, and contrasted what a second Obama term would look like with a possible Romney term.  While the panel concerned enforcement generally, there was substantial focus on the healthcare industry.  In particular, Jeff Perry described recent FTC enforcement actions in detail, including the FTC's challenges to ProMedica's acquisition of St. Luke's hospital.  Interestingly, Jeff Perry stressed that, in addition to strong economic analysis, the parties' documents and opposition from payors drive the FTC's decision as to whether to litigate hospital mergers.  He also assured the audience that the FTC would continue to aggressively scrutinize provider combinations regardless of the outcome of the forthcoming election.

The materials from the presentation are available by clicking here.

Healthcare Roundtable on Healthcare Executive Liability – On Friday, September 28, 2012, at 1:00 - 2:30 P.M. Eastern Time, King & Spalding will host an Atlanta-based Roundtable focused on recent developments in healthcare executive liability.  Participants will be able to attend in person or via Webinar.

The Roundtable will include the following topics:

• Government resources allocated to healthcare fraud investigation and prosecution after Health Reform;
• OIG's increasing use of exclusion authority to target healthcare executives;
• Discussion of factors reviewed by OIG in exclusion decisions and proactive steps to consider;
• Criminal liability for executives under the responsible corporate officer doctrine;
• Director and officer liability insurance policies, undertakings, "Upjohn warnings," and defense issues for consideration by individuals; and
• Lessons learned from recent high-profile prosecutions and exclusion proceedings against healthcare executives

More information about this Roundtable is available by clicking here.

This bulletin provides a general summary of recent legal developments. It is not intended to be and should not be relied upon as legal advice.

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