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Health Headlines – January 27, 2014

27 Jan 2014

HIPAA Covered Entities Subject to FTC Act Enforcement of Data Security Practices – On January 16, 2014, the Federal Trade Commission (FTC) unanimously ruled that it has authority to regulate a healthcare provider’s inadequate data security programs in order to protect consumers from business’ failure to protect consumers from identify theft or misuse of personal information under section 5 of the FTC Act, 15 U.S.C. § 45(a)(1).  The FTC’s decision clarifies that healthcare providers and other “covered entities” regulated under the Health Insurance Portability and Accountability Act (HIPAA) must ensure that their data security practices comply with both HIPAA and the FTC Act.

On August 28, 2013, the Commission issued an administrative complaint against LabMD, a clinical lab company that allegedly engaged in practices that “failed to provide reasonable and appropriate security for personal information on its computer networks.”  LabMD filed a motion to dismiss the Commission’s Complaint, and the recent ruling dismissed the lab’s motion.  In its ruling, the Commission analyzes why HIPAA and other statutes do not preempt the commission’s FTC Act authority because, among other things, “[n]othing in HIPAA, HITECH, or any of the other statutes . . . reflects a ‘clear and manifest’ intent of Congress to restrict the Commission’s authority over allegedly ‘unfair’ data and security practices.”

The FTC’s ruling will likely impact federal cases that challenge the FTC’s authority under the FTC Act over data security practices, including the following two cases:  LabMD, Inc. v. FTC, D.D.C., No. 1:13-cv-1787 (LabMD’s lawsuit against the FTC raising HIPAA preemption as a defense); and FTC v. Wyndham Worldwide Corp., D.N.J., No. 13-1887 (broadly challenging whether the FTC has authority to regulate data security practices under the FTC Act).  The FTC’s ruling is available here

Reporter, Juliet M. McBride, Houston, +1 713 276 7448,    

FTC Successfully Challenges Non-Reportable Acquisition of Physician Group – On January 24, 2014, the U.S. District Court for Idaho held that St. Luke’s Health System (St. Luke’s) acquisition of Saltzer Medical Group (Saltzer) violated Section 7 of the Clayton Act and ordered St. Luke’s to fully divest itself of Saltzer’s physicians and assets.  The court issued a short opinion that mostly announces the outcome.  The court will release its full opinion with detailed findings of fact and conclusions of law following its review of any objections by St. Luke’s, Saltzer, and third parties—which must be submitted by January 27, 2014—regarding the possible release of confidential and business-sensitive information. 

The FTC has won a number of challenges to healthcare mergers in the past few years (e.g., ProMedica/St. Luke’s), but this was a litigated challenge to a healthcare system’s acquisition of a physician group, which have been resolved typically through consent orders.  Although we will analyze the court’s full opinion when it is available, the FTC’s complaint indicates that the parties’ documents and objections from employers and payors played a key role in litigating the case and serves as a reminder that providers should carefully evaluate their documents and the extent of support from employers and payors in assessing a transaction’s antitrust exposure.  For a more detailed discussion of this issue, please see our recent Client Alert, available by clicking here.  

Reporter, John Carroll, Washington, D.C., +1 202 626 2993,

MedPAC Votes to Reduce Payments for Certain Hospital Outpatient Services to Levels Paid at Physician Offices – We reported in last week’s Health Headlines that the commissioners of the Medicare Payment Advisory Commission (MedPAC) voted unanimously on January 16, 2014 to recommend that Congress reduce hospital outpatient rates for 2015 to bring them in line with physician office rates.  At the time of our report, however, the transcript of MedPAC’s meeting was not yet available.  The almost 450-page transcript is now available and contains interesting additional details regarding MedPAC’s proposals.

For example, MedPAC’s recommendation does not apply to all services, but only to Ambulatory Payment Classification (APC) codes that meet certain criteria.  Practically speaking, therefore, MedPAC recommended that hospital outpatient payment rates for 66 APCs be reduced to match the rates paid at physician offices.  This recommendation, standing alone, would lead to “lower overall Medicare revenue for hospitals of about 0.6 percent and lower Medicare OPD [Outpatient Department] revenue of 2.7 percent.”  Because MedPAC was concerned that such a reduction would lead to negative Medicare margins for virtually every hospital in the nation, MedPAC also recommended that Congress increase 2015 prospective payment system rates by 3.25 percent, which would be an increase of 1.05 percent over current law.  The net result, therefore, if both MedPAC proposals were adopted would actually be higher rates in 2015 than under current law.  This does not take into account the effects of the sequester, however, which MedPAC was clear that it “opposes” because it “reduces . . . rates[s] below [MedPAC’s] recommended rate[s].” 

MedPAC also unanimously approved a recommendation “to reduce incentives to admit patients who are not appropriate candidates for LTCH [Long Term Care Health] services.”  In particular, MedPAC recommended that CMS continue to “maintain a separate LTCH payment system” but limit higher LTCH level payments to “LTCH patients that were chronically critically ill, or CCI.”  All other the non-chronically critically ill cases “would be paid IPPS-based rates.”  Under this recommendation, “LTCHs would be required to maintain an average length of stay of more than 25 days only for their CCI cases.”  MedPAC also recommended that the savings from this policy change be transferred to the IPPS outlier pool and used to increase outlier payments for the treatment of the chronically critically ill.

MedPAC’s primary rationale for these recommendations was that the current system “encourage[s] care to be shifted to higher-cost sites” which, in turn, “can increase provider costs of care, increase Medicare program costs, and increase beneficiary cost sharing without any evidence that care is improved.”   The commissioners cited evidence that precisely this sort of shift had occurred including that “the volume of E&M [Evaluation & Management] office visits, echocardiograms, and nuclear cardiology services that are provided in freestanding offices all decreased in 2011 and 2012 while the volume increased in OPDs for the same services.”  With these recommendations, therefore, MedPAC is seeking to “align[] payment rates for similar cases across silos in order to eliminate this distortion in Medicare prices which can create inefficiency.”

MedPAC’s recommendations are expected to appear in its March 2014 report to Congress.

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

OIG: Housing Placement Arrangement for Seniors Does Not Give Rise to Sanctions − The HHS Office of Inspector General (OIG) recently issued a favorable Advisory Opinion (No. 14-01) regarding a contractual arrangement under which a placement agency receives a per-resident fee for referring new residents to certain senior living communities.  OIG concluded that, while the arrangement could lead to prohibited remuneration under the anti-kickback statute under certain circumstances, it did not constitute grounds for imposing sanctions. 

According to the Advisory Opinion, the requestor (the “Parent Company”) is a nonprofit corporation that owns and controls eleven senior residential communities, two skilled nursing facilities, and a management company that negotiates contracts and provides other management services for the Parent Company.  The majority of the residents at the Parent Company’s residential communities, according to OIG, pay for rent and services themselves or receive coverage under private insurance.  OIG further noted that, outside of the small percentage of residents of the Parent Company’s residential communities who receive coverage for services under a specific state Medicaid waiver program, the company’s skilled nursing facilities are the only affiliated entities that provide services reimbursed under federal health care programs.

The arrangement at issue involves contracts between two of the Parent Company’s residential communities and an independent placement agency specializing in senior housing (the “Placement Agency”).  Under the arrangement, the Placement Agency “promote[s]” available housing at the two residential communities and coordinates the placement of new residents there.  For each new resident placed at one of the communities through the Placement Agency, the arrangement provides for the payment of a fee to the agency.  The fee is calculated based on a portion of each new resident’s charges during his or her initial stay, usually one or two months.  OIG noted that the fee does not take into account charges to federal health care programs, such as Medicare.  OIG also noted that the underlying contracts prohibit the Placement Agency from referring new residents to the participating residential communities “who are known to rely, in whole or in part, on Medicaid, Medicare, or other state or federal funding sources” and that the participating residential communities cannot accept such new residents from the Placement Agency.

Based on four factors, OIG concluded that the arrangement poses a low risk of improper payments for referrals under the anti-kickback statute, and, accordingly, does not constitute grounds for OIG sanctions.  First, the fee paid to the Placement Agency is not calculated on the basis of any charges to federal health care programs—rather, it includes only initial rent and services paid for by the referred resident.  Second, the underlying contracts prohibit the Placement Agency from referring, and the residential communities from accepting, residents who rely on funding from government health programs.  Third, the Placement Agency does not refer residents for housing or services payable by federal health programs (e.g., services provided by skilled nursing facility staff).  Fourth, the Parent Company certified that its affiliates—i.e., the residential communities, skilled nursing facilities, and management company—do not track referrals among them, nor do they place limits on a resident’s ability to choose a particular provider of health services.

A copy of OIG’s report is available here.

Reporter, Greg Sicilian, Atlanta, +1 404 572 2810,

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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