News & Insights


December 19, 2017

Health Headlines – December 18, 2017

Healthcare Highlights from the GOP’s Tax Reform Plan – The House and Senate negotiators emerged on Friday, December 15, 2017, with a compromise tax reform proposal that would overhaul the Internal Revenue Code for the first time since 1986. Nonprofit hospitals and other tax-exempt organizations breathed a sigh of relief when the conference committee decided to preserve private activity bonds and maintain the medical expense deduction, but the compromise proposal contains a number of potentially far-reaching provisions that will impact the governance and operations of charitable hospitals.

What’s In?

Individual Mandate

The conference committee bill would repeal the individual mandate imposed as part of the Affordable Care Act. The Joint Committee on Taxation (JCT) projects that eliminating the tax penalty imposed on individuals for failing to buy health insurance will save $338 billion over the next ten years. Repealing the mandate produces the estimated savings as a result of lower income individuals electing not to purchase health coverage and foregoing the accompanying Federal tax subsidies.

The American Hospital Association, the American Medical Association, and America’s Health Insurance Plans opposed repealing the individual mandate without an alternative health reform plan. These organizations argue that repealing the individual mandate will result in a significant increase in insurance premiums, leaving ten million without access to affordable health insurance.

Executive Compensation Excise Tax

Charitable hospitals and other nonprofit organizations will face a new 21-percent excise tax on the amounts in excess of $1 million that they pay to each of their five highest paid employees. The charitable hospital would remain liable for the excise tax in future years even if the individual no longer ranks as one of its top five highest paid. The excise tax will also apply to certain parachute payments that typically arise at retirement or severance.

The House and Senate had each passed a 20-percent executive compensation excise tax, but the conference committee increased the tax to 21 percent so that it equaled the new corporate tax rate. In a move likely to lessen the excise tax burden on some charitable hospitals, the conference committee proposed to exempt compensation paid to physicians in exchange for their professional services from the tax. However, if a physician is paid by a charitable hospital in any other capacity, such as serving as a chief executive officer, chief medical officer, or an employed medical director, the tax would apply. The executive compensation excise tax will become effective for tax years beginning after December 31, 2017.

Tax-Exempt Bonds – Advance Refunding

House and Senate negotiators spared private activity bonds from elimination in the compromise legislation, but they elected to retain a proposal to terminate advance refunding bonds issued after December 31, 2017. Taking this financing mechanism away from charitable hospitals and other nonprofit organizations is expected to generate $17.4 billion over the next ten years.

UBIT – Fringe Benefits

The conference committee retained a House proposal to tax charitable hospitals and other nonprofit organizations on the expenses they incur in providing employees with transportation benefits, parking facilities, and on-premises gyms and other athletic facilities. Under the tax reform legislation, the value of these fringe benefits would be treated as unrelated business income and would be subject to the corporate tax rate. The provision is designed to mirror changes in the deductibility of these fringe benefits by for-profit employers, and it would apply to any amounts paid or incurred after December 31, 2017.

UBIT – Calculation

The Senate proposal for charitable hospitals and other tax-exempt organizations to calculate unrelated business income separately for each line of business prevailed in the conference committee. This change means that gains from one activity could not be offset with losses from another. The IRS had previously expressed concern about tax-exempt organizations utilizing large losses from activities to reduce or eliminate any unrelated business income tax, and its agents had occasionally attempted to assert this position during audits of tax-exempt organizations. Calculating unrelated business income in this manner is expected to generate $3.5 billion over the next ten years. This revision will become effective for tax years beginning after December 31, 2017.

UBIT – Net Operating Loss Deduction

The conference committee limits the use of net operating losses in a more draconian fashion than what the House or Senate had originally proposed. The House and Senate had each proposed allowing net operating losses to offset only 90 percent of taxable income. The conference committee decided to limit net operating losses rising in tax years beginning after December 31, 2017, to 80 percent of taxable income. This change appears to be a significant component of how Congress will pay for the tax reform legislation as the  JCT expects it to generate over $200 billion in the next ten years.

College Endowment Excise Tax

The compromise legislation also includes a 1.4-percent excise tax on the investment income that colleges and universities earn from holdings in their endowments. The new excise tax applies to tax years beginning after December 31, 2017, and it is expected to generate over $1.8 billion over the next ten years.

Deductibility of Medical Expenses

For 2017 and 2018, the conference agreement allows all taxpayers to deduct medical expenses exceeding 7.5 percent of adjustable gross income. In 2019, the threshold would return to its current 10 percent. The House bill had proposed eliminating this deduction entirely, but the Senate bill retained and expanded the provision. According to the JCT, expanding the current deduction to all taxpayers, as opposed to retaining the current law limiting the deduction to those age 65 and older, for 2017 and 2018 is projected to cost $4.6 billion over ten years.

What’s Out?

The final tax reform legislation did not include several controversial measures that the House had proposed. As noted earlier, the compromise legislation spares private activity bonds, and makes no further changes to the unrelated business income tax. Dual status entities, like many county hospitals, had feared a proposal that expressly sought to subject their business activities to the unrelated business income tax, and tax-exempt research organizations had faced a proposal that would have narrowed exclusions they utilize in calculating unrelated business income. Finally, the conference committee denied efforts by the House to allow charitable organizations to engage in political activities.

The House and Senate are expected to vote on the agreement early this week. The conference report can be found here.

Reporters, Travis Jackson, Los Angeles, CA, + 1 213 443 4374,, and Allison F. Kassir, Washington, D.C., + 1 202 626 5600,

Laboratory Group Challenges CMS’s Implementation of Clinical Laboratory Commercial Data Reporting Requirements – On December 11, 2017, the American Clinical Laboratory Association (ACLA) filed suit on behalf of its membership against the Secretary of HHS, challenging the Secretary’s implementation of the Protecting Access to Medicare Act of 2014 (PAMA). In PAMA, Congress required the Secretary to collect private payor reimbursement rate information from “applicable laboratories,” which the Secretary would then use to establish new Medicare reimbursement rates for clinical laboratory services. Under the final rule, however, the Secretary does not collect information from the vast majority of laboratories, including virtually every hospital outreach laboratory. ACLA is seeking declaratory and injunctive relief, requiring the Secretary to comply with the terms of PAMA and setting aside the Secretary’s final rule exempting thousands of laboratories from reporting private payor data. In October, 23 organizations, including the American Hospital Association, the American Medical Association and ACLA, requested that CMS suspend full implementation of the final rule, citing significant concerns with the Secretary’s data collection process. ACLA is represented by King & Spalding in this matter.

Congress defined “applicable laboratory” to be any “laboratory” that received a majority of its Medicare revenues from the Physician Fee Schedule or Clinical Laboratory Fee Schedule, with certain exceptions for laboratories with low service volume. According to ACLA’s challenge, the Secretary disregarded the statute’s express language and adopted a different definition of “applicable laboratory,” limiting the reporting requirement to those laboratories that have their own National Provider Identifier (NPI) before applying the majority of Medicare revenues test. The new NPI requirement, which does not appear in the statute, effectively carves out hospital outreach laboratories from reporting private payor data. Hospital outreach laboratories provide services to non-hospital patients, often referred for testing from local physicians, and are typically paid on the Clinical Laboratory Fee Schedule.

The ACLA complaint asserts that excluding hospital outreach laboratories from the statutory reporting obligations is significant. First, approximately 7,000 hospital laboratories obtain payment under the Clinical Laboratory Fee Schedule, receiving approximately 26 percent of all such Medicare payments. Nonetheless, only 21 hospital laboratories reported private payor data under the Secretary’s definition of “applicable laboratory” — less than 1 percent of the reported laboratory test volume. Second, excluding hospital laboratories from having to report private payor data omits the entities with the highest private payor rates, estimated to be approximately 160 percent of current Medicare rates. By comparison, large, independent laboratories, which reported the vast majority of data used by the Secretary to set new payment rates, typically have lower cost structures and thus often have lower private payor rates, well-below Medicare payment rates. The result is a significant reduction in payments under the Clinical Laboratory Fee Schedule:  $670 million less in payments in 2018, which is more than six times what the Congressional Budget Office estimated when PAMA was enacted.

As explained in the declarations accompanying the complaint, the exclusion of hospital outreach laboratories from the private-payor data reporting requirements, and the associated decrease in Clinical Laboratory Fee Schedule rates effective January 1, will force many laboratories to scale back services or go out of business altogether. This may leave Medicare beneficiaries without access to crucial diagnostic care, particularly in rural areas or specialized settings like nursing homes.

The case is American Clinical Laboratory Association v. Hargan, No. 1:17-cv-2645 in the United States District Court for the District of Columbia. The complaint is available here.

Reporter, Elizabeth Swayne, Washington, D.C., +1 202 383 8932,

D.C. Federal District Court Clarifies that Laboratories Are Not Required to Independently Determine the Medical Necessity of Tests Ordered By Physicians -- On December 11, 2017, the United States District Court for the District of Columbia granted in part and denied in part defendant Boston Heart Diagnostics Corporation’s (Boston Heart) motion to reconsider the court’s ruling on Boston Heart’s motion to dismiss the relator’s claims under the False Claims Act and pendent State false claims. The district court corrected its prior ruling to clarify that that although laboratories are required by statute to certify the medical necessity of the tests at issue, they are not required to independently determine the medical necessity of the tests. The court nonetheless found that the relator had sufficiently alleged that Boston Heart submitted false claims and denied its request to dismiss the relator’s remaining claims.

The relator in the FCA action is a medical director at United Healthcare. The relator’s second amended complaint against Boston Heart, a clinical laboratory, alleged violations under the FCA and pendent State false claims for allegedly billing for medically unnecessary tests to screen for cardiac-related issues and predict future cardiac risk. The United States, along with the 27 states and the District of Columbia on whose behalf the relator asserted false claims act violations, declined to intervene in the qui tam action.

On June 9, 2017, the district court declined to dismiss the relator’s presentment and false statements claim under the FCA, as well as her analog presentment and false statements claims under various State false claims act statutes, but dismissed relator’s “reverse false claims” under the FCA and the analog State statutes.

With respect to the relator’s presentment claim, the court found, among other things, that relator alleged an express false certification under the FCA by alleging that Boston Heart failed to comply with the Medicare rules restricting covered services to those that are medically necessary, despite Boston Heart’s express certification to the contrary on the CMS-1500 form. The court found that Boston Heart “has an obligation to establish that the tests for which it seeks government reimbursement are medically necessary because when it submits the CMS-1500 form, it certifies that the tests performed were medically necessary.”  The court also found that the relator sufficiently pled that Boston Heart knew that its tests were medically unnecessary by alleging that Boston Heart engaged in a “systematic and fraudulent scheme” to encourage providers to order the medically unnecessary tests through, among other things, written marketing materials and pre-printed test forms that increase the number of tests that the laboratory conducts by including a number of medically unnecessary tests. Lastly, the court found that the relator sufficiently alleged that Boston Heart made false statements under the FCA when it certified that its tests were medically necessary on the CMS-1500 form.

On June 23, 2017, Boston Heart filed a motion for reconsideration of the court’s order on the motion to dismiss, requesting that the court reconsider its conclusion “that Boston Heart has an obligation to establish that the tests for which it seeks government reimbursement are medically necessary,” which Boston Heart contended underlay the court’s conclusions with respect to both falsity and knowledge as to relator’s presentment and false statements allegations.

In its December 11, 2017 memorandum opinion, the court concluded that it must grant in part and deny in part Boston Heart’s motion for reconsideration. The court clarified that “a laboratory may rely on the ordering physician’s determination of medical necessity in the laboratory’s certification to HHS on the CMS-1500 form,” but nonetheless concluded that despite its correction, the court’s denial of Boston Heart’s motion to dismiss the relator’s federal and state presentment and false statements claims was proper.

In correcting its conclusion on medical necessity, the court reviewed OIG guidance cited by Boston Heart, which provided that “laboratories do not and cannot treat patients or make medical necessity determinations.”  The court concluded that “it overstated a laboratory’s obligation to establish that the tests for which it seeks government reimbursement are medically necessary,” reasoning that the OIG guidance “would have explicitly included that obligation among its recommended compliance processes if it had intended to impose such an obligation on laboratories, and to suggest otherwise would entirely contradict that explicit language of the OIG Guidance.” 

The court also reconsidered a Medicare regulation cited by Boston Heart in support of its motion to dismiss regarding documentation and recordkeeping requirements. The court noted that it did not consider the regulation in the context of the negotiated rulemaking that produced it, which addressed the “tension between Medicare’s statutory medical necessity requirement,” and the “special circumstances related to laboratories.”  Upon review of HHS’s explanations of the regulation, the court concluded that HHS’s view supported the court’s conclusion that although laboratories are required by statute to certify the medical necessity of the tests at issue, they are not required to independently determine the medical necessity of the tests billed.

Despite its clarification that Boston Heart is not required to independently determine the medical necessity of tests ordered by physicians, the court disagreed with Boston Heart that this conclusion meant that the relator failed to allege sufficient facts establishing the falsity and knowledge elements of her Federal and State presentment and false statement claims. The court found that the relator’s allegation that Boston Heart engaged in a scheme to encourage non-cardiology physicians to order medically unnecessary tests through a false marketing campaign and pre-printed test requisition forms “would constitute a knowing violation of its legal duty to ensure that it is not submitting false or incorrect claims to Government payors.” 

The case is United States ex rel. Groat v. Boston Heart Diagnostics Corp., Case No. CV 15-487 (RBW), 2017 WL 6327540 (D.D.C. Dec. 11, 2017). The court’s December 11, 2017, memorandum opinion is available here.

Reporter, John Whittaker, Sacramento, CA, +1 916 321 4808,

FTC Wins Provider Merger Challenge in District Court – On December 13, 2017, a federal district court issued an order preliminarily enjoining the merger of North Dakota healthcare providers, Sanford Health, Sanford Bismarck, (Sanford) and Mid Dakota Clinic, P.C. (MDC). The order prohibits the merging parties from consummating their transaction until an administrative trial before the Federal Trade Commission (FTC) is complete. The administrative trial was scheduled to begin on November 28, 2017, but has been continued to January 17, 2018. The North Dakota Attorney General had also joined as a plaintiff in the complaint for a preliminary injunction.

The complaint alleges that Sanford and MDC are the largest providers of certain healthcare services in the Bismarck-Mandan region. The FTC claims that the merger would harm competition in several services lines and would result in a combined entity possessing a 75 percent market share for adult primary care physicians, and a 100 percent market share for general surgery physicians.

The FTC has enjoyed a recent string of litigation wins in the healthcare space, including successful appeals in Penn State Hershey Medical Center/PinnacleHealth and Advocate/NorthShore. Moreover, the current action is one of several merger challenges filed in 2017, including the recent case filed by the Department of Justice to block the AT&T/Time Warner merger and the FTC’s action against the merger of titanium dioxide companies, Tronox/Cristal. These cases further reaffirm the continued aggressive approach to merger enforcement under the Trump administration.

Materials related to the litigation are available by clicking here.  King & Spalding’s detailed Client Alert on this development is available by clicking here.

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

OIG Issues Advisory Opinion Regarding Proposed Pilot Program Involving Health Technology Collaboration Between Health System and MA Plan – On December 4, 2017, the HHS Office of Inspector General (OIG) issued an Advisory Opinion No. 17-07 regarding a proposed pilot program involving a health technology collaboration funded by a pharmaceutical manufacturer and administered amongst a trade association, Medicare Advantage plan, health system, and vendor responsible for creating the electronic interface. The pilot program seeks to test whether certain minor improvements in technology involved in medication therapy management (MTM) services provided by a Medicare Advantage (MA) plan can help decrease hospital readmissions for MA plan beneficiaries who were admitted to the hospital with one of the five diagnoses that are eligible conditions under the Hospital Readmission Reduction Program (HRRP): pneumonia; congestive heart failure; acute myocardial infarction; chronic obstructive pulmonary disease; and elective total hip or knee arthroplasty. The pharmaceutical manufacturer submitted a request for the OIG’s feedback on whether the pilot program implicated prohibited conduct under the federal anti-kickback statute.

In analyzing the pilot program, the OIG highlighted the following key elements of the proposed arrangement in its opinion:

  • The pharmaceutical manufacturer would fund the pilot program (but would not have access to any data or the electronic interface used in the program) and manufactures only two products to treat or prevent any of the eligible conditions subject to the program.
  • MA plan pharmacists would have real-time electronic access to certain discharge information for qualifying MA plan beneficiaries to conduct MTM services. The pharmacists would not be prompted to use certain drugs or formularies throughout the pilot.
  • The hospital system would identify and engage administrators, quality officers, discharge planners, and would ensure sufficient resources to identify and recruit patients to participate in the pilot.
  • The vendor would establish and monitor the electronic interface to be used by the pilot program participants.
  • The trade association would contribute management services and oversight and would establish evaluation tools to ensure that the pilot program was operating according to the outlined plans.

The OIG reasoned that, although the pilot program could potentially implicate certain aspects of the federal anti-kickback statute, the arrangement presents minimal risk to patients or federal healthcare programs for a number of reasons. First, there are safeguards to reduce the risk that the manufacturer’s involvement would influence prescribing or formulary decisions; for example, the pilot program materials would be unbranded and would not promote the manufacturer funding the program. Second, the pilot program would unlikely lead to increased costs or overutilization of federally reimbursable services because increased costs would work counter to the MA plan’s interests. Third, nothing in the pilot program would prompt the MA plan pharmacists to select one product over another. Fourth, the pilot program would be unlikely to have a negative impact on patient quality of care since one of the underlying goals of the program is to reduce hospital readmissions. And, last, the pilot program is limited in the number of patients (approximately 200), scope (to only the five HRRP diagnoses), and monetary investment (funding would not exceed $257,000 and would be distributed across states in the pilot).

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


King & Spalding Healthcare and Life Sciences Reception in San Francisco – Please join us at King & Spalding’s reception for our clients and friends in the life sciences and healthcare industries. The reception will take place on January 9, 2018 from 6:30-8:30 p.m. at the SFMOMA Atrium, 151 3rd Street in San Francisco, California. To RSVP, please click here.