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Health Headlines - December 10, 2012

10 Dec 2012

Supreme Court Hears Argument in Sebelius v. Auburn Regional Medical – On December 4, 2012, the Supreme Court heard oral argument in Sebelius v. Auburn Regional Medical Center (Docket No. 11-1231), a case which presents the question whether the Medicare statute’s 180-day time limit for filing cost report appeals before the Provider Reimbursement Review Board may be equitably tolled.  The Auburn hospitals filed appeals alleging that CMS had failed to use the best available data to calculate their SSI ratios and, as a result, they were underpaid Medicare DSH payments dating back to 1987.  The plaintiffs’ claims are similar to the claims successfully appealed in Baystate Medical Center v. Leavitt, 545 F.Supp.2d 20 (D.D.C. 2008).  But unlike the Baystate plaintiff, the Auburn plaintiffs did not file their appeal within either the statutory 180-day time limit or the regulatory three-year extension of the time limit for good cause.  The Auburn plaintiffs requested that the Board equitably toll the 180-day time period, arguing that they could not have filed a timely appeal because the government had concealed its failure to use the best available data.  The Board dismissed the appeal, holding that it did not have the power to toll the 180-day limit. 

The government petitioned the Supreme Court to review the case following a D.C. Circuit decision which reversed the Board, citing to Supreme Court case law which holds that when Congress allows for claims against the government, there is a presumption that Congress also intends the time limits for filing those claims to be equitably tolled unless there is clear evidence in the language of the statute to the contrary.  The D.C. Circuit found none in the Medicare statute.  Complicating the government’s argument was the fact that the agency itself had promulgated a regulation that allows for a three-year extension of the 180-day time limit if a provider can show “good cause.”

The Supreme Court heard argument not only from the government and Auburn’s counsel, but also from a third party, appointed by the Court as amicus curiae to present the argument that the 180-day time limit is strictly jurisdictional and allows for no extensions at all and, therefore, the Secretary’s good cause regulation is invalid.  Two federal courts of appeal had earlier split on this issue, and several questions from the Court focused on this point.  Some justices, particularly Justice Sotomayor, pressed the Deputy Solicitor General as to why the presumption for equitable tolling did not apply in this case and questioned how the agency could reasonably read the statute to allow for good cause extensions but not allow for equitable tolling.  Justice Sotomayor challenged government’s counsel as to whether the statute could not be tolled even, hypothetically, in the face of clear government misconduct.  Justice Breyer pressed Auburn’s counsel on the flip side of this argument, asking counsel to define the point in time at which it would be reasonable for the government to cut off such claims and why three years was not sufficient.  The Court took the case under advisement.  The Court will almost certainly announce its decision before the end of June, 2013, and likely well before then. 

Access important documents related to this case, including briefs and oral argument transcripts, here

Reporter, Mark Polston, Washington, D.C., +1 202 626 5540,

CMMI Announces Preliminary List of Affected MS-DRGs to Be Tested in Models 2 through 4 of the Bundled Payments for Care Improvement Initiative – On November 30, CMS’s Center for Medicare & Medicaid Innovation (CMMI) announced its preliminary list of 48 clinical episodes (and included MS-DRGs) it will test in Models 2 through 4 of its Bundled Payments for Care Improvement (BPCI) Initiative.  According to CMMI, this preliminary list was constructed based upon input including thousands of episode definitions proposed in the applications it received.  Candidates for Models 2 through 4 have been asked to choose from among the listed episodes which bundling episodes they would like to test. 

Under the BPCI Initiative, CMS will combine payment for multiple services received by a patient during a defined “episode of care.”  In exchange for agreeing to accept discounted Medicare payments for specified services, BPCI participants have the opportunity to reap the benefits of cost savings achieved through coordinated care delivery and gainsharing arrangements that realign physician incentives.  In their applications, which for Models 2 through 4 were due on June 28, 2012, providers were asked to choose among four different bundling models:

  • Model 1—payment is bundled for all inpatient hospital services, for all MS-DRGs (CMS subsequently indicated that it will not proceed with Model 1 at this time);
  • Model 2—payment is bundled for all inpatient hospital services, physician services, and post-acute care services, for agreed-upon MS-DRGs only;
  • Model 3—payment is bundled for all physician services and post-acute care services relating to an inpatient stay, for agreed-upon MS-DRGs only; and
  • Model 4— payment is bundled for all inpatient hospital services and physician services furnished during an inpatient stay, for agreed-upon MS-DRGs only.

Applicants for Models 2 through 4 were asked to propose definitions for particular “episodes of care” for which they would like to receive bundled payments.  Episodes are defined in terms of included MS-DRGs for which payment would be bundled for services furnished during the inpatient admission (for Models 2 and 4) and/or during a post-acute or post-episode period of 30 days or longer (for Models 2, 3, and 4).

CMMI’s preliminary episode list is available in the “Additional Information” section of the BPCI website, or by clicking here.

Reporter, Susan Banks, Washington, D.C., +1 202 626 2953,

IRS Releases Final Rule on Medical Device Tax – Last week, the IRS and the Treasury Department published final regulations regarding the medical device excise tax under § 4191 of the Internal Revenue Code (IRC).  IRC § 4191, which was enacted by the Health Care and Education Reconciliation Act of 2010 in conjunction with the Patient Protection and Affordable Care Act, imposes an excise tax of 2.3% on the sale of certain medical devices.  The medical device excise tax applies to manufacturers and importers and generally does not apply to individual consumers. 

The IRS and the Treasury Department developed the final regulations in consultation with technical experts at the FDA and CMS, and after reviewing numerous public comments received regarding proposed regulations published last February.  The final regulations are applicable to sales of taxable medical devices after December 31, 2012.

Internal Revenue Code § 4191(b)(1) generally provides that a “taxable medical device” is any device, as defined in § 201(h) of the Federal Food, Drug & Cosmetic Act (FFDCA) that is intended for humans.  Noting in the preamble that the FDA requires a device defined in § 201(h) of the FFDCA that is intended for humans to be listed as a device with the FDA under § 510(j) of the FFDCA and 21 CFR Part 807 (with limited exceptions), the final regulations track this FDA requirement by defining a taxable medical device as a device that is listed as a device with the FDA under § 510(j). 

In responding to comments requesting various exceptions to this general approach, the IRS and Treasury Department in the preamble consistently refused such requests and continued to adhere to the FFDCA § 510(j) listing as the key factor in determining whether a device satisfies the definition of a “taxable medical device.”  For example, devices that have both human and veterinary uses but that are listed with the FDA under § 510(j) are taxable medical devices under IRC § 4191, even with respect to sales into the veterinary market.  Similarly, even a “dual use” device that is listed under § 510(j) but that is sometimes used for non-medical purposes will, nonetheless, be a taxable medical device for purposes of IRC § 4191.  In addition, because a humanitarian use device for which the FDA has approved a Humanitarian Device Exemption (HDE) is listed under § 510(j), the preamble to the final regulations states that such a device also is a taxable medical device.  Under the same reasoning, the preamble states that software and software updates that are not listed as devices with the FDA under § 510(j) do not fall within the definition of a taxable medical device.

IRC § 4191(b)(2) provides an exception for certain “retail” items.  In particular, the term “taxable medical device” does not include any device of a type that is generally purchased by the general public at retail for individual use, such as eyeglasses, contact lenses, and hearing aids.  Under the final regulations, a device will be considered to be of a type generally purchased by the general public at retail for individual use if it is regularly available for purchase and use by individual consumers who are not medical professionals, and if the design of the device demonstrates that it is not primarily intended for use in a medical institution or by a medical professional. 

The final regulations adopt a facts and circumstances approach to determining whether a particular device falls within the retail exception.  The approach requires a balancing of factors set forth in Treas. Reg. § 48.4191-2(b)(2).  No one factor is determinative, and a device may qualify for the retail exception even if it meets one or more negative factors set forth in the final regulations.  The final regulations also include seven additional examples that illustrate the process for determining whether a device falls within the retail exception.

The final regulations do not address certain issues that the IRS and the Treasury Department continue to study.  These issues include the determination of price under IRC § 4216(b); the tax treatment of medical software licenses; the taxability of donated medical devices; and the taxability of medical convenience kits.  In order to provide rules for manufacturers on an interim basis, however, the IRS and the Treasury Department have issued Notice 2012-77.

You can view the final rule here.  In addition, Notice 2012-77 is available here.

Reporters, Constance F. Dotzenrod, Atlanta, +1 404 572 3585,, Greg Sicilian, Atlanta, +1 404 572 2810,

Bolstered By Favorable District Court Decision, King & Spalding Now Forming Group Appeals Contesting Inclusion of Part C Days in SSI Fraction for FYs 2006 and Later – In a recent decision for which King & Spalding organized the appealing group of hospitals and was co-counsel, the D.C. district court ruled that CMS’s regulation requiring the inclusion of Medicare Part C patient days in the SSI fraction of the Medicare DSH formula starting in 2006 was invalid.  In light of this decision, which is available here, and in response to interest expressed by several clients, King & Spalding is now forming group appeals of this issue to the Provider Reimbursement Review Board (Board) for 2006 and later cost reporting periods. Under the Board's rules, if a hospital is the only related hospital appealing a particular issue for a particular fiscal year, that hospital may join with other unrelated hospitals in bringing an appeal of an issue.  Related hospitals appealing the same issue for the same fiscal year must be grouped together.   

CMS has until January 14, 2013 to appeal the district court decision to the D.C. Circuit Court of Appeals.  If CMS does appeal, the appellate decision probably would not be issued until mid-2014.  In the meantime, however, it is essential for providers to protect their appeal rights by filing timely Board appeals (i.e., appeals within 180 days of the issuance of the Notice of Program Reimbursement (NPR)).  Although CMS had instructed fiscal intermediaries not to settle cost reports for DSH hospitals for 2006 forward pending the calculation of “final” SSI numbers, this bar has recently been lifted and DSH hospitals should be beginning to receive NPRs for these cost reporting periods.

While we strongly urge DSH hospitals to include this item as a “protested item” on cost reports filed in the future, a hospital’s failure to do so in prior years is by no means fatal to the provider’s appeal rights.   For one thing, the change in regulation requiring providers, in the absence of an audit adjustment, to have a protest item for a particular issue only applies to cost reporting periods ending on or after December 31, 2008.  This rule, therefore, does not apply to 2006,  2007, or 2008 cost reporting periods.  In addition, in most cases the intermediary will have made an adjustment to the SSI fraction based on CMS’s recomputation of SSI percentages, which itself should be sufficient for Board jurisdiction.  There may be good arguments in support of jurisdiction in other cases as well. 

Similar legal arguments exist for contesting CMS's inclusion of "no Part A payment" days (i.e. non-covered days) in the SSI Ratio and its exclusion of dual eligible no Part A payment days from the Medicaid fraction.  King & Spalding will be forming similar group appeals contesting this CMS DSH policy as well. 

If you are interested in participating in a group appeal of these  issues, or would like further information, please contact Dan Hettich at +1 202 626 9128, or Greg Etzel at +1 713 751 3280,

King & Spalding Issues Client Alert On CMS New Draft Guidance – On November 29, 2012, CMS issued a new draft guidance regarding its Coverage with Evidence Development (CED) policy for National Coverage Determinations (NCDs).  As CMS has increasingly used CED in recent years to provide, and often limit, Medicare coverage for promising new medical treatments, revisions to this policy will be of particular interest to manufacturers of new and innovative technologies seeking Medicare coverage.  Comments on the draft guidance may be submitted to CMS until January 28, 2013.

For the full King & Spalding Client Alert issued December 6, 2012, click here.

Ernst & Young and King & Spalding Host Forum On Capital Raising and M&A Transactions Related To Healthcare Services – On November 29th, 2012, Ernst & Young and King & Spalding hosted a unique forum at the King & Spalding offices at which senior healthcare executives, debt and equity capital sources, private equity firms, venture capitalists and their advisors discussed the opportunities, challenges and current state of capital raising and M&A transactions within the healthcare services marketplace. The distinguished group of panelists and speakers included representatives from: SunTrust, Goldman Sachs, Raymond James, Morgan Stanley Capital Partners, Ridgemont Equity Partners, Fulcrum Equity Partners, Highland Capital Management, The Riverside Company, King & Spalding and Ernst & Young, as well as the CEO of Regenesis Biomedical and the former Chairman of CVS Caremark.  

For additional information about this event, please contact Bill Spalding at +1 404 572 3577 or

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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