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Health Headlines – June 22, 2015

22 Jun 2015


D.C. Circuit Remands HHS’ “Per-Click” Equipment Lease Rule to District Court The Court of Appeals for the District of Columbia Circuit recently considered HHS’s authority to enact a 2008 rule that prohibited physicians who lease equipment to a hospital from doing so on a “per-click basis” while referring patients to that hospital for procedures using the equipment.  73 Fed. Reg. 48434 (Aug. 19, 2008).  The regulation banned leases that charged the hospital for each use of the equipment—also referred to as leases with “per-click” payments—and instead required monthly or yearly payments for the leases.  The regulation was designed to prohibit potentially self-interested referrals under the Stark Law.  On June 12, 2015, in its decision Council for Urological Interests v. Burwell, the D.C. Circuit ultimately held that the rule exceeds HHS’s statutory authority, and remanded the rule for HHS to further consider whether the regulation is consistent with congressional intent.

The challenge to the 2008 rule was brought by a group of joint ventures, principally owned by urologists, that lease laser technology to hospitals.  The urologists had entered into agreements with a hospital whereby the hospital paid the joint venture for the equipment on a per-click basis.  The D.C. Circuit reviewed HHS’s interpretation of the 2008 regulation under the two-step test in Chevron v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), first determining whether Congress directly spoke to the precise question at issue, and second determining whether HHS’s interpretation was based on a reasonable construction of the statute.  The D.C. Circuit determined that the 2008 regulation meets the first step in Chevron and that the Stark Law expressly permits HHS to impose additional conditions on equipment rental agreements and does not necessarily forbid HHS from banning per-click leases.  However, the court found that the regulation does not pass step two of the Chevron test because it is inconsistent with a 1993 House Conference Report that interpreted the Stark Law.  Ultimately, the court remanded the proceedings to the district court for HHS to consider whether a per-click ban on equipment leases is consistent with the 1993 Conference Report and congressional intent.   

The 2008 final rule is available here.  The D.C. Circuit opinion is available here.

Jennifer S. Lewin, Reporter, Atlanta, 404 572 3569,

 MedPAC Releases June 2015 Report to the Congress – The Medicare Payment Advisory Commission (MedPAC) released its “Report to the Congress: Medicare and the Health Care Delivery System” on June 15, 2015.  As previously reported, the report makes recommendations for policy issues involving hospital short-stays.  The report also discusses several other topics, including: synchronizing Medicare policy across the three payment models; the next generation of Medicare beneficiaries; Part B drug payment policy issues; linking Part B payment for drugs to comparative clinical effectiveness evidence; polypharmacy and opioid use among Part D enrollees; Part D risk sharing; and developing measures for quality of care within Medicare. 

In the June 2015 report, MedPAC makes several recommendations involving short-stays at hospitals, including the following:

  • HHS should withdraw the Two Midnight Rule, focus Recovery Audit Contractors’ (RACs’) review on hospitals with a high use of short stays, improve the accountability of RACs for claims they deny, and synchronize the timing of RAC review with the hospital rebilling program.
  • The Secretary should evaluate developing a payment penalty for hospitals with excess rates of short inpatient stays to substitute—in whole or in part—for RAC review of short inpatient stays.
  • Congress should revise the skilled nursing facility (SNF) eligibility requirement of three hospital inpatient days to allow for up to two outpatient observation days to count toward meeting that requirement.
  • Congress should require acute-care hospitals to notify beneficiaries placed in outpatient observation status that their status may affect their financial liability for SNF care.  The notice should be provided to patients in observation status for more than 24 hours and who are expected to need skilled nursing services.  The notice also should be timely, allowing patients to consult with their physicians and other health care professionals before discharge planning is complete.
  • Congress should package payment for self-administered drugs provided during outpatient observation on a budget-neutral basis within the hospital prospective payment system.

The report also considers the following issues but does not reach an official recommendation:

Synchronizing Medicare Policy Across the Three Payment Models

  • MedPAC investigated how best to synchronize payment rules and incentives across Medicare’s three different payment models (fee-for-service, Medicare Advantage, and Accountable Care Organizations).  MedPAC found that each payment model offered certain advantages for different markets.  For example, Medicare Advantage plans were the most likely to generate savings in high-service-use markets but the least likely to generate savings in low-service-use markets.  Although MedPAC did not make a recommendation regarding how to achieve synchronization, MedPAC outlined certain equitable considerations, such as the impact on beneficiaries in different areas of the country, that should be considered in such efforts. 

The Next Generation of Medicare Beneficiaries

  • The report discusses how the Medicare population is expected to increase from 54 million beneficiaries to over 80 million beneficiaries by 2030, with beneficiaries having longer life expectancies and higher rates of chronic conditions.  Finding it likely that fewer future Medicare beneficiaries will have generous employer-sponsored supplemental health insurance, the report also notes that the number of tax-paying workers per Medicare beneficiary has declined from 4.6 during the early years of the program to 3.1 currently.  This number is expected to fall to 2.3 by 2030, while Medicare’s reliance on general revenues is projected to increase from 41 percent of costs today to 45 percent of program costs by 2030.

Part B Drug Payment Policy Issues

  • Medicare pays providers for a drug based on the average sale price plus six percent (ASP + 6% ) regardless of the price the provider pays to acquire the drug.  The report considers that the six percent add-on may incentivize the use of higher priced drugs to generate more profit, even though lower priced alternatives may be available.  The report examines an alternative policy to replace the six percent add-on with a flat-fee add-on to incentivize providers to choose the lower priced alternative—generating Medicare savings—although MedPAC notes this might also make it more difficult to buy very expensive drugs.
  • Medicare pays the same rate for Part B drugs to 340B hospitals and non-340B hospitals, even though the 340B hospitals can purchase drugs at steep discounts (paying on average at least 22.5% below ASP).  Noting that Medicare beneficiaries must pay a cost-sharing liability for 20 percent of Medicare’s payment rate, the report suggests that Medicare could pay less to 340B hospitals and that beneficiaries’ cost sharing could be reduced; however, the report acknowledges that these changes could reduce the level of 340B savings that hospitals receive, and therefore might reduce participation in the 340B program.

Linking Part B Payment for Drugs and Biologics to Comparative Clinical Effectiveness

  • MedPAC notes that Medicare’s payment policies for Part B drugs do not always provide beneficiaries or taxpayers the best value because the policies do not give clinicians incentives to consider evidence of a drug’s clinical effectiveness compared with its alternatives. 
  • To address this issue, MedPAC examined the following three alternative pricing policies:
    • Least costly alternative (LCA) and functional equivalence policies—utilized from 1995 to 2010—set the payment rate for a group of drugs with similar effects at the rate of the least costly product in the group.
    • Consolidated payment code approach—used from 2007 to 2008—groups drugs with similar health effects into a single payment code and sets payment rates based on the volume-weighted average of the ASP for each product.
    • A bundled approach could cover drugs as well as related services across all providers during a defined period under one payment.  The report specifically looks into designing oncology bundles.
  • MedPAC concluded that bundling, in particular, has the potential to encourage providers to make clinically appropriate decisions about the most efficient mix of services beneficiaries receive and has the potential to improve care coordination and result in positive downstream effects, such as reduced hospital admissions and emergency department visits.  Accordingly, the report suggests that CMS consider conducting an oncology bundling demonstration.

Polypharmacy and Opioid Use Among Part D Enrollees

  • Studies have found a positive association between polypharmacy (the use of multiple drugs) and adverse events like hospitalization.  Problems related to adherence and adverse drug events are even more likely when opioids are included in a multiple drug regimen.  The report notes that research on results from programs to reduce unnecessary drug use has been limited. 
  • While MedPac does not make a recommendation regarding how to address polypharmacy issues, it outlines several approaches for addressing polypharmacy risks, such as limiting the number of prescribers or pharmacies beneficiaries may use and medication therapy management programs.   

Part D Risk Sharing

  • The report noted that a strong market for stand-alone drug plans has developed and that the purpose of Part D risk sharing arrangements might no longer be necessary.  As a result, several options are discussed, such as requiring plans to include more of the cost of catastrophic spending in covered benefits.  This option, for example, was based on the belief that exposing plans to greater risk might provide an incentive to manage benefit spending.

Measuring Quality of Care Within Medicare

  • Instead of relying primarily on clinical process measures to assess the quality of hospitals, physicians, or other providers, the report considers measuring population-based outcomes like “healthy days at home.”

The full text of the report is available here.  The report also includes an online appendix that reviews CMS’s letter concerning the 2016 fee schedule for physicians and other health professionals.

Reporters, Adam Bowling, Summer Associate, Atlanta, GA, +1 404 572 5204,, and Isabella Edmundson, Atlanta, GA, + 1 404 572 3527,

HRSA Publishes Proposed Rule on 340B Ceiling Prices and Manufacturer CMPs – On June 17, 2015, the Health Resources and Services Administration (HRSA) published a Proposed Rule that would codify standards for the calculation of ceiling prices by manufacturers for covered outpatient drugs under the 340B Program and provide for imposition of civil monetary penalties (CMPs) on manufacturers who knowingly and intentionally charge a covered entity more than the ceiling price.  Comments on the Proposed Rule are due by August 17, 2015. 

Calculation of Ceiling Prices

First, HRSA reaffirms in the Proposed Rule the basic methodology for calculation of the ceiling price—Medicaid Average Manufacturer Price (AMP) less the Medicaid Unit Rebate Amount (URA) for the smallest unit of measure, calculated to six decimal places—and reiterates the “penny pricing” exception. 

HRSA then proposes “to codify the longstanding policy from the 1995 final guidelines” for new drug price estimation that would require manufacturers to estimate a ceiling price for the first three quarters and apply a calculated ceiling price for the fourth quarter.  Manufacturers would have to then calculate the “actual” ceiling prices for the first three quarters and retroactively refund “overcharged” covered entities for that period.
HRSA solicits comments on all aspects of the proposed methodology.

Civil Monetary Penalties    

Under the Proposed Rule, “[a]ny manufacturer with a pharmaceutical pricing agreement that knowingly and intentionally charges a covered entity more than the ceiling price . . . for a covered outpatient drug, may be subject to a civil monetary penalty not to exceed $5,000 for each instance of overcharging a covered entity.”  Any CMP would be in addition to repayment for an instance of overcharging.

An “instance of overcharging” would include “any order for a certain covered outpatient drug, by NDC [National Drug Code], which results in a covered entity paying more than the ceiling price.”  Thus, each order for an NDC would constitute a single instance, regardless of the number of units, and would include any order placed directly with a manufacturer or through a wholesaler, distributor or agent.  An instance of overcharging could occur either at the time of initial purchase or in the event of subsequent ceiling price recalculations where the manufacturer does not refund or credit a covered entity. 

HRSA emphasizes in the Proposed Rule that the proposed CMPs apply to manufacturers, and, thus, that manufacturers are obligated to ensure that a covered entity receives a 340B drug at or below the ceiling price, regardless of whether the covered entity acquires the drug through a wholesaler.  HRSA states that manufacturers should consider the role of wholesalers and work out issues in normal business arrangements, as a manufacturer’s failure to ensure that covered entities receive the appropriate 340B discount through its distribution arrangements could be grounds for assessment of CMPs.

The HHS Office of Inspector General would have the authority to bring 340B CMP actions.

Reporter, Kerrie S. Howze, Atlanta, +1 404 572 3594,

 Also in the News

King & Spalding to Host Reception at AHLA  King & Spalding cordially invites you to a reception in conjunction with the American Health Lawyers Association (AHLA) Annual Meeting.  The reception will be held on Tuesday, June 30, 2015 from 5:00 – 7:00 p.m. on the rooftop deck of King & Spalding’s Washington office.  For more information and to RSVP, please click here.

King & Spalding to Host Roundtable on the Supreme Court’s Upcoming Decision in King v. Burwell  At the end of June, the U.S. Supreme Court will issue its decision in the King v. Burwell case challenging the availability of Affordable Care Act subsidies for private insurance in a majority of the States.  On Wednesday, July 8, 2015, King & Spalding will be hosting an Atlanta-based Roundtable addressing the decision, the political fallout, and its impact on healthcare providers, life sciences companies, and consumers.  For more information and to register, please click here.

The content of this publication and any attachments are not intended to be and should not be relied upon as legal advice.

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