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Health Headlines - November 19, 2012

19 Nov 2012

Hospitals Win a Case Challenging CMS Policy to Include Part C Days in the SSI Fraction in the Medicare DSH Formula On November 15, 2012, the United States District Court for the District of Columbia released a 33-page opinion ruling in favor of a group of hospitals that had challenged CMS’s policy of including Medicare Part C patient days in the SSI fraction in the Medicare DSH formula. The effect of CMS’s policy, announced in 2004, but not applied until 2009, albeit retrospectively to 2006, was to reduce Medicare DSH payments.  While the effect of CMS’s policy varies considerably from hospital to hospital, the result of this case, if applied to all Medicare DSH hospitals, would likely have a material impact on improving Medicare DSH payments.  King & Spalding organized the appealing group of hospitals and was co-counsel in the case.  A copy of the opinion can be seen by clicking here

Since SSI enrollees are less likely to be enrolled in a Medicare Advantage plan (formerly Medicare+Choice), including these Part C patients in the SSI fraction had the effect of reducing the value of that fraction, and hence, reduced Medicare DSH payments.  Virtually all hospitals were hurt by CMS’s policy, but there are some large hospitals with high DSH percentages for which the annual adverse effect is in excess of $1 million. 

CMS has 60 days within which to appeal.  If CMS does appeal, it is extremely unlikely that it would apply the District Court’s decision vacating its policy to include Part C patients in the SSI fraction unless and until the hospitals win the appeal.  The appellate decision probably would not be issued until mid-2014. 

All DSH hospitals should consider appealing this issue.  For cost reports filed in the future, all DSH hospitals should include this item as a “protested item” to avoid having CMS assert that the hospital failed to protect its appeal rights.  For prior years, there are strong arguments that hospitals can appeal regardless of whether they included a claim on their cost reports, but the government may contend that there is no jurisdiction over such appeals. 

Reporter, Dennis Barry, Washington, D.C., +1 202 626 2959,

CMS Implements Statutory Reduction to Bad Debt Reimbursements – In a final rule issued November 9, 2012, CMS implemented the across the board reductions to Medicare’s bad debt reimbursement percentages as prescribed by Sections 3201(a) and (b) of the Middle Class Tax Extension and Job Creation Act of 2012 (Pub. L. 112-96).  See 77 Fed. Reg. at 67518-519 (Nov. 9, 2012). Prior to the reductions, Medicare reimbursed hospitals 70 percent of the bad debt amounts associated with unpaid Medicare beneficiary deductibles or copayments and 70 percent of the bad debt associated with patients in skilled nursing facilities (SNFs) that were not dual eligible individuals.  Starting October 1, 2012, Medicare will only reimburse 65 percent of these bad debts costs.  Bad debt reimbursement for all other entities eligible to receive bad debt payments, which formerly received 100 percent reimbursement, including critical access hospitals, rural health clinics, Federally qualified health centers, end stage renal disease (ESRD) facilities, and patients that are dual eligible individuals in SNFs, will be reduced by approximately 12 percent per year, starting with FY 2013, until reimbursement plateaus at 65 percent in 2015. 

Responding to comments, CMS said that it “appreciate[d] the concerns of the provider community regarding bad debt payments” but that “the percent reductions of bad debt payments are statutorily mandated.”  CMS provided a table, reproduced below, summarizing the reductions.

Reporter, Daniel J. Hettich, Washington, D.C., +1 202 626 9128,

FTC and Pennsylvania Attorney General Seek to Block Reading Health System’s Proposed Acquisition of Surgical Institute of Reading – On  November 16, 2012, the Federal Trade Commission (FTC) announced that the FTC and Pennsylvania Attorney General (AG) will jointly file a complaint in U.S. District Court for the Eastern District of Pennsylvania next week to obtain a preliminary injunction to block Reading Health System’s proposed acquisition of the Surgical Institute of Reading (SIR), pending an FTC administrative trial and any appeals. The FTC also issued an administrative complaint, which initiates the FTC proceedings before an FTC Administrative Law Judge regarding whether the transaction would violate the antitrust laws.

According to the FTC’s administrative complaint, the proposed acquisition would reduce competition in four markets where Reading Health System and SIR compete: (1) inpatient orthopedic/spine surgical services; (2) outpatient orthopedic/spine services; (3) outpatient ENT surgical services; and (4) outpatient general surgical services.  In each market, the FTC alleges, the proposed acquisition would lead to combined Reading Health System/SIR market shares ranging from 49 to 71 percent.  The transaction would also increase Reading Health System’s negotiating leverage, enabling it to raise the reimbursement rates it negotiates with commercial health plans.

This action is yet another reminder that the FTC has been aggressively investigating, and challenging, hospital mergers and acquisitions in what the FTC considers to be concentrated markets.

The FTC’s press release is available by clicking here.

Reporters, Jeffrey Spigel, Washington, D.C., +1 202 626 2626, and John Carroll, Washington, D.C., +1 202 626 2993,

OIG Concludes Improvements Needed at ALJ Level of Review – The OIG issued a report on November 15, 2012 (OEI-02-10-00340) in which it concluded that the administrative law judge (ALJ) level of appeal requires improvements in a number of areas due to (i) apparent substantive inconsistencies between the interpretation of Medicare policy applied by ALJs and qualified independent contractors (QICs) and (ii) the existence of process inefficiencies at the ALJ level.  The OIG made various recommendations to CMS and the Office of Medicare Hearings & Appeals (OMHA) for achieving improvements in both areas. 

The asserted need for improvements appears largely based on the OIG’s findings that there were a high percentage of full reversals at the ALJ level (56%) and that the ALJs’ bases for such reversals reflected less strict interpretations of Medicare policies than employed by QICs.  Fully-favorable reversals at the ALJ level, however, were less likely when CMS participated in the appeal.  The report reflected a concern that appellants have an incentive to appeal because the cost of doing so is minimal and the chances of a favorable outcome are high; this is particularly the case among “frequent flyers,” or appellants that filed at least 50 appeals or more in fiscal year 2010. OIG’s implicit assumption is that the relatively high number of ALJ decisions in favor of appealing providers reflects a problem with the ALJ process and not a problem with the QIC process.

In addition to inconsistencies in substantive review between ALJs and QICs, the OIG found various process inefficiencies at the ALJ level of appeal.  While admission of new evidence at the ALJ level is prohibited absent a showing of good cause, many ALJs employed a wide interpretation of good cause to accept new evidence from appellants.  Inefficiencies also arise, according to the OIG’s findings, because the ALJ continues to employ paper files, whereas the QICs have moved to electronic files.  In addition, the OIG found that ALJ staff handle suspicions of fraud inconsistently. 

Based on these findings, the OIG made three sets of recommendations.  It issued joint recommendations to CMS and OMHA to:

  • develop and provide coordinated training on Medicare policies to ALJs and QICs;
  • identify and clarify Medicare policies that are unclear and interpreted differently between ALJs and QICs;
  • standardize case files and make them electronic at the ALJ level;
  • revise regulations to provide more guidance to ALJs regarding the acceptance of new evidence; and
  • improve the handling of appeals from appellants who are also under fraud investigation and seek statutory authority to postpone these appeals when necessary.

To OMHA, the OIG recommended:

  • seek statutory authority to establish a filing fee;
  • implement a quality assurance process to review ALJ decisions;
  • determine whether specialization among ALJs would improve efficiency; and
  • develop policies to handle suspicion of fraud appropriately and consistently and train staff accordingly.

The OIG recommended that CMS:

  • continue to increase CMS participation in ALJ appeals.

Aside from raising due process concerns regarding the postponement of cases under fraud investigations, CMS and OMHA largely either concurred with the OIG’s recommendations or promised to engage in further evaluation of recommendations. Among the recommendations identified for further evaluation by CMS and/or OMHA were those concerning (i) changes to regulations governing admission of new evidence; (ii) establishing a filing fee; (iii) ALJ specialization; and (iv) increased participation by CMS in ALJ appeals.

Click here to obtain a copy of the OIG report.

Reporter, Tracy Weir, Washington, D.C., +1 202 626 2923,

OIG Finds That More Than $1 Billion in Inappropriate Medicare Payments Were Made to SNFs in 2009 – The OIG recently issued a report (OEI-02-09-00200) concerning improper skilled nursing facility (SNF) Medicare payments in calendar year 2009 (the Report). The OIG reviewed a stratified random sample of SNF claims from 2009 and, as part of its review, determined whether: (1) the claims satisfied Medicare SNF coverage requirements, and (2) the medical records supported the information reported by the SNFs on the Minimum Data Sets (MDS). According to the Report, SNFs billed one-quarter of all claims in error in 2009, which equates to $1.5 billion in improper Medicare payments. 

The OIG explained that it undertook this review because in recent years the OIG “has identified a number of problems with billing by skilled nursing facilities (SNF), including the submission of inaccurate, medically unnecessary, and fraudulent claims.”  The OIG also noted that the Medicare Payment Advisory Commission (MedPAC) has recently raised concerns that the SNFs may be inappropriately billing for therapy services in order to obtain additional Medicare payments.  

While OIG recognized CMS’ recent SNF payment changes that are designed to reduce inappropriate payments, OIG believes that further actions are needed to reduce inappropriate SNF payments.  Accordingly, OIG recommended that CMS:

  • Increase and expand reviews of SNF claims,
  • Use CMS’ Fraud Prevention System to identify SNFs that are billing for higher paying resource utilization groups (RUGs),
  • Monitor compliance with new therapy assessments,
  • Change the current method for determining how much therapy is needed to ensure appropriate payments,
  • Improve the accuracy of MDS items, and
  • Follow up on the SNFs that billed in error.

CMS concurred with all six of the OIG’s recommendations.  To view the Report, click here.

Reporter, Stephanie F. Johnson, Atlanta, +1 404 572 4629,

CMS Issues Notice That Value-Based Purchasing Summary Reports for FY13 Are Now Available – On November 7, 2012, CMS posted notice announcing that actual percentage payment summary report for fiscal year (FY) 2013 Hospital Value-Based Purchasing (VBP) program was available on its QualityNet website.  The report provides information to FY 2013 VBP Program participating hospitals of their actual, as opposed to estimated, Total Performance Score (TPS) and incentive payment adjustment for the first year of the VBP program.  Hospitals must request a recalculation of their performance scores on each condition, domain, and TPS within 30 calendar days of the date on which their Value-Based Percentage Payment Summary Report is posted on QualityNet.  An adverse determination from CMS on such recalculation request is a prerequisite to appeal.  Therefore, failure to request recalculation within 30 days of posting on QualityNet will result in waiver of any future appeal of those issues. 

CMS’s notice is available here

Reporter, Adam Robison, Houston, +1 713 276 7306,

AHA Submits Letter to IRS Requesting Updates to the Agency’s Private Business Procedure (Revenue Procedure 97-13) Based On PPACA Arrangements – In a letter dated November 15, 2012, the American Hospital Association (AHA) requested that the IRS update IRS Revenue Procedure 97-13 (Rev. Proc. 97-13) as part of its implementation of the Patient Protection Affordable Care Act (PPACA) and in recognition of other recent changes affecting hospitals.  Under Rev. Proc. 97-13, tax-exempt hospitals and medical foundations whose facilities are financed by tax-exempt bonds are subject to restrictions on the amount of “private business use” that can occur within such facilities.  While safe harbors under Rev. Proc. 97-13 allow non-profit hospitals to enter into certain contracts with private service providers, the safe harbors are not broad enough to cover various arrangements required or encouraged by PPACA, such as accountable care organizations (ACOs), bundled payments, and other shared programs.  Hospitals are also subject under PPACA to readmission reduction and value-based purchasing requirements.  According to the AHA’s letter, Rev. Proc. 97-13 “prevents the types of arrangements that can effectively align incentives among physicians, hospitals and other health care service providers to meet the goals of these two policies.”  The ACA therefore recommended that the IRS issue guidance clarifying that the various ACA programs, and similar programs, “do not involve incentives designed to maximize net profits, but rather involve incentives designed to improve the quality and efficiency of care and, consequently, address its costs.” 

The AHA’s brief letter, which is available here, was submitted in follow-up to a recent meeting held between the IRS and AHA and to prior, more detailed letters to the IRS from the AMA, the American Bar Association (ABA), and the National Association of Bond Lawyers (NABL), respectively.  The AMA’s, ABA, and NABL’s earlier letters are available here, here, and, here respectively. 

Reporter, Adam Robison, Houston, +1 713 276 7306,

Court Denies Whistleblowers Motion for Summary Judgment Finding Agreements Specific Enough to Meet Anti-Kickback Statute Safe Harbors – On October 29, 2012, the federal District Dourt for the Middle District of Florida denied a whistleblower’s summary judgment motion alleging that certain agreements failed to meet the safe harbors established under the Anti-Kickback Statute.  United States ex rel. Armfield v. Gills, No. 8:07-cv-2374, 2012 WL 5340131 (M.D. Fla., Oct. 29, 2012).  At issue in the case were space and equipment leases and a services agreement between the defendants, St. Luke’s Cataract and Laser Institute and St. Luke’s Surgical Center, and a physician, who provides preoperative examinations at St. Luke’s. 

In the motion for summary judgment, the qui tam whistleblowers contended that the agreements between the defendants and the physician failed to meet the specificity requirements of the Anti-Kickback Statute safe harbors.  The safe harbors for space and equipment leases and service agreements require that the agreements, among other things, are in writing, are for a period of not less than one year, are signed by the parties, and specify the equipment or space leased or service provided and the duration of the agreement.  In addition, the safe harbors require that rental charges be set in advance in a manner consistent with fair market value in arms-length transactions without regard to referrals and that the space or equipment rented be reasonably necessary to accomplish the commercially reasonable business purpose of the rental. See 42  C.F.R. § 1001.952.

The court determined that the agreements were sufficiently specific to meet the safe harbor requirements.  The space and equipment lease agreement at issue provided an address for the premises covered by the lease and defined space as the “exclusive use of private office space sufficient for physician and office manager; exclusive use of an examination area…[and] exclusive use of an area for the storage of medical records….”  The lease further specified the contract value, monthly payments, and “1021.66 SQ Feet @ $20.00” as the premises rented.  In addition, the definition of “Medical & Office Equipment” in the agreement covered “certain furniture, supplies, and equipment ‘as mutually agreed upon by the parties as appropriate for the assessment and diagnosis of disease.’”  The agreement also contained a calculation of the fair market value and useful life of each item.  Finally, “Non-Medical Personnel” in the services agreement included “receptionists, medical records staff, clerical support staff, and others necessary to assist…in [the] provision of medical services.”  The court explained that the regulations setting out the safe harbors require no more specificity than that provided in the agreements, noting that the goal of the safe harbor is to provide transparency and verifiability.  Because the agreements clearly identified the space, equipment, and services provided, the court found that no more specificity was required.  Accordingly, the court denied the whistleblowers' motion for summary judgment.  The opinion may be read here.

Reporter, Paige Fillingame, Houston, +1 713 615 7632,

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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