News & Insights


January 17, 2023

Health Headlines – January 17, 2023

Supreme Court to Determine Whether False Claims Act Requires Objective Scienter Standard

Last week, the Supreme Court granted review to clarify the scienter requirement in False Claim Act (31 U.S.C. §§ 3729 et seq.) (FCA) cases. This significant decision will affect the scope of FCA liability by addressing what is required to prove that a defendant acted “knowingly” for purposes of the FCA.

As background, FCA liability does not attach unless a plaintiff can establish the defendant “knowingly” submitted false claims for payment to the government. The term “knowingly” is statutorily defined to refer to defendants who act with “actual knowledge,” “deliberate ignorance,” or “reckless disregard.” The plaintiff must prove only one of these to satisfy the FCA’s knowledge requirement.

Most U.S. Courts of Appeal have held that the FCA requires an objective scienter standard. This means that a defendant who acts pursuant to an incorrect interpretation of a relevant statute or regulation does not act “knowingly” under the FCA if their interpretation was objectively reasonable and there is not authoritative guidance suggesting their interpretation was wrong. A reasonable interpretation of an ambiguous law thus does not result in FCA liability.

In United States ex rel. Schutte v. SuperValu, Inc., the qui tam relators alleged that SuperValu charged customers a discounted price for prescription drugs, but fraudulently reported the non-discounted price as its “usual and customary” (U&C) price to Medicare Part D and Medicaid, thereby knowingly submitting false reports to the government. Extending the objective scienter standard adopted in the Fair Credit Reporting Act case Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007) to the FCA, the district court found that the relators failed to establish the requisite scienter because SuperValu’s interpretation of the U&C price was objectively reasonable at the time it submitted its reports.

On appeal, the U.S. Court of Appeals for the Seventh Circuit affirmed the district court’s ruling. The Seventh Circuit reasoned that Safeco reflects a common law principle that applies with equal force to each interpretation of “knowingly” under the FCA. In addition, the Seventh Circuit held that subjective intent has no bearing on the FCA’s scienter analysis.

The Seventh Circuit issued a similar ruling in United States, ex rel. Thomas Proctor v. Safeway, Inc., holding that Safeway’s practice of billing the government undiscounted rates as U&C prices did not violate the FCA because U&C pricing was not clearly defined. The Seventh Circuit determined that without guidance from the courts or binding authority from an applicable agency as to the meaning of U&C prices, the relator was unable to establish that Safeway acted “knowingly.”

The relators in both SuperValu and Safeway filed petitions for a writ of certiorari, which the Supreme Court granted on January 13, 2023. In each case, the Supreme Court has been asked to address “whether and when a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct are relevant to whether it ‘knowingly’ violated the [FCA].” The decision is likely to have a significant impact on the landscape of FCA litigation.

Reporter, Elizabeth Key, Sacramento, +1 916 321 4821,

CMS Reworks the Medicare Cost Report for Hospitals

On December 29, 2022, CMS posted on its website Transmittal 18, which implements sweeping changes to the Medicare cost report for hospitals and its accompanying instructions. The revisions affect nearly every facet of Medicare reimbursement for hospitals, including uncompensated care, Medicare DSH, bad debt, and graduate medical education. The changes in Transmittal 18 are effective for cost reporting periods beginning on or after October 1, 2022.

Transmittal 18 makes significant changes to Worksheet S-10 of the cost report, which is principally used to collect uncompensated care data from hospitals for use in calculating Medicare uncompensated care payments.  The agency has split Worksheet S-10 into two parts. Part I will be the former S-10, wherein hospitals will continue to report the uncompensated care costs of the entire facility, including rehabilitation and psychiatric units. In Part II, hospitals will report only the uncompensated care costs of inpatient and outpatient services that are billable under the hospital’s provider number. In a comment accompanying this change, CMS explains that it will consider using the data in Part II to calculate uncompensated care payments to hospitals in future years. 

Transmittal 18 also clarifies the instructions to Worksheet S-10 in several respects. The new instructions specify that hospitals that received funding from the Provider Relief Fund for services rendered to uninsured COVID-19 patients may not report the charges for those services on Worksheet S-10. Additionally, the instructions to Worksheet S-10 now state that CMS will infer a contractual relationship between a provider and an insurer if a provider accepts as payment any amount from an insurer. Finally, Transmittal 18 clarifies that if a patient has insurance, but none of the patient’s stay is covered, the patient is deemed uninsured, and their charges (if unpaid) must be reported in Column 1 of the worksheet, where they will be reduced by the cost-to-charge ratio.

CMS has also updated the cost report to implement changes in policy resulting from recent litigation. First, CMS has modified the instructions for reporting Medicaid eligible patient days on Worksheet S-2, Line 24. The new instructions specify that hospitals may report patient days of patients regarded as eligible for Medicaid under a waiver authorized under section 1115 of the Social Security Act. CMS made this change in response to the decision of the United States Court of Appeals for the District of Columbia in Bethesda Health, Inc. v. Azar, 980 F.3d 121 (D.C. Cir. 2020), which overturned CMS’s former policy of excluding section 1115 days from the count of Medicaid eligible days. King & Spalding represented the plaintiff hospitals in Bethesda

Second, CMS modified the instructions for calculating direct graduate medical education (DGME) payments on Worksheet E-4. The new instructions implement the revised DGME payment methodology that CMS adopted in the inpatient prospective payment system rule for FY 2023. The new methodology eliminates the penalty for hospitals that (1) train resident fellows, and (2) operate in excess of their FTE caps. The agency’s former methodology, which included that penalty, was struck down in Milton S. Hershey Medical Center v. Becerra, 2021 WL 1966572 (D.D.C. 2021).  King & Spalding represented 32 out of the 56 hospitals in Milton S. Hershey.

Transmittal 18 also introduces four new exhibits that must be submitted with the cost report. These exhibits contain the standard format hospitals must use to report the necessary information to support Medicaid eligible days, Medicare bad debt, total bad debt (for use in Worksheet S-10), and charity care.

Other significant changes in Transmittal 18 include:

  • New lines and worksheets for hospitals to report and claim reimbursement for the acquisition costs of cellular therapy and chimeric antigen receptor T-cells;
  • New lines on Worksheet E Part A and E-4 for hospitals to report additional FTE slots awarded under section 126 of the Consolidated Appropriations Act of 2021;
  • New lines on Worksheet E Part A and E-4 for hospitals to report resets to FTE caps and per-resident amounts under section 131 of the Consolidated Appropriations Act of 2021;
  • Revision to the sequestration adjustment under the Protecting Medicare and American Farmers from Sequester Cuts Act of 2021; and
  • Revisions to accommodate providers participating in the Community Health Access and Rural Transformation (CHART) model.

A PDF copy of the new cost report is available here. The revised instructions to the cost report are available here

Reporter, Alek Pivec, Washington D.C., +1 202 626 2914,

Court Rules on Retrospective Relief for 340B Hospitals Without Vacating CMS’s Rules

On January 10, 2023, Judge Contreras of the United States District Court for the District of Columbia ruled that CMS’s 340B drug reimbursement rates dating back to January 1, 2018, were unlawful and underpaid affected hospitals. This decision follows Judge Contreras’ September 28, 2022, decision that vacated CMS’s 340B drug payment policy on a prospective basis. Here, however, Judge Contreras’ ruling fell short of vacating CMS’s prior rules or specifically ordering CMS to make prompt and full repayment to the affected hospitals.  

As background, prior to 2018, CMS paid all acute care providers for separately payable outpatient drugs at the rate of average sales price (ASP) plus 6% as required by statute. Effective in 2018, however, CMS implemented its 340B rate cut policy to cut the rates for separately payable drugs purchased under the 340B program to ASP minus 22.5 percent.

A group of plaintiffs, consisting of 340B hospitals and hospital associations, challenged the Secretary’s 340B rate cut in federal court. Plaintiffs were initially successful in district court, which concluded that the Secretary violated the plain language of the statute. The district court’s decision was reversed by the D.C. Circuit. The Supreme Court reviewed the case to determine whether the 340B rate cuts were lawful under the statute. On June 15, 2022, the Supreme Court issued a unanimous ruling in American Hospital Assn. v. Becerra, declaring that CMS’s 2018 and 2019 reimbursement outpatient drug rate cut to 340B hospitals was “contrary to the statute and unlawful.” The Supreme Court, therefore, reversed the judgment of the D.C. Circuit and remanded the case for further proceedings. The D.C. Circuit subsequently remanded the case to the District Court for the District of Columbia to determine the remedies. 

On remand, the district court considered two separate motions to address the proper remedy for 340B hospitals. The first motion sought to vacate the portion of the 340B reimbursement rate in the 2022 OPPS Rule, which continued to pay hospitals ASP minus 22.5% for 340B drugs. The second motion addressed a retrospective remedy concerning the underpayments to 340B hospitals under the unlawful reimbursement rates in prior OPPS Rules going back to 2018. On September 28, 2022, the district court ruled on the first motion by vacating CMS’s drug reimbursement rate for 340B hospitals in the 2022 OPPS Final Rule. The vacatur, however, was limited to the “remainder of 2022” i.e., for 340B drug claims with dates of service on or after September 28, 2022. 

Last week’s decision is the district court’s ruling on the second motion concerning retrospective relief for 340B claims that were underpaid between January 1, 2018 and September 27, 2022. Here, the district court’s opinion acknowledged that vacatur is the typical remedy when an agency’s rules are found to be unlawful. The court instead decided to remand the matter to the agency without vacatur because of the “potentially disruptive consequences” that would result from vacatur, including alleged concerns of budget neutrality and the “enormous number of settled transactions” that occurred from 2018-2022—amounting to $10 billion by some estimates—that the agency would need to remediate. 

Regarding the remedy on remand, the court wrote, “[t]o the extent Plaintiffs seek an order commanding HHS to repay each underpaid claim to the penny, that cannot possibly be the only rational choice available to the agency.” In other words, the court endorsed the notion that, on remand, CMS may have a number of potential remedies including issuing a prospective one-time rate increase that would avoid precisely calculating individual claims for each hospital. 

The Court acknowledged that CMS has announced plans to address the 2018-2022 rates in the forthcoming CY 2024 rulemaking cycle and did not retain jurisdiction over the matter on remand. 

The district court’s opinion in American Hospital Association v. Becerra is available here.  

Reporter Michael L. LaBattaglia, Washington, D.C., +1 202 626 5579,

Emergency Medicine Group Suing Over Alleged Corporate Practice of Medicine Violations in California

The American Academy of Emergency Medicine Physician Group (AAEM-PG) sued Envision Healthcare in California, alleging that Envision’s use of so-called “friendly PC” business structures violates California’s laws regarding the corporate practice of medicine (CPOM). The suit, which is set for trial in January 2024, has significant potential implications for physician practice management (PPM) companies and private equity sponsors that have invested heavily in PPMs and physician groups. 

At least 30 states, including California, have enacted some form of CPOM restriction. CPOM laws are generally intended to prevent unlicensed persons or entities from employing physicians or controlling the practice of medicine. The restrictions take many different forms and vary significantly from state to state. States with CPOM laws generally require that all of the owners of a physician practice entity must be licensed to practice medicine, subject to certain limited exceptions. As a result, private equity sponsors and other unlicensed investors generally cannot own the equity of a physician practice.

In order to facilitate investment in physician practices, private equity sponsors and other investors typically use what is known as a “friendly PC” structure. Under a standard friendly PC structure, the investors own equity in a management services organization (MSO) that purchases the nonclinical assets of the professional corporation (PC) that operates the practice. The PC retains all clinical assets and continues to employ the physicians. The MSO then enters into a long-term management agreement with the PC that provides for the MSO to perform nonclinical administrative services for the PC in exchange for a management fee. Management agreements typically provide for the PC and its physicians to have sole and exclusive authority over clinical decisions and the practice of medicine. The MSO also generally enters into an equity transfer restriction agreement with the physician-owners of the PC, pursuant to which the MSO can require the physician-owners to transfer ownership to a physician designated by the MSO upon the occurrence of certain triggering events.

In the suit, AAEM-PG argues that Envision’s use of friendly PC arrangements constitutes illegal control over the practice of medicine by its managed medical groups in violation of California’s CPOM laws. Advocates for PPMs have defended the friendly PC model, arguing that it facilitates necessary investments in physician practices that are facing increased cost pressures and allows physicians to focus on practicing medicine without being distracted by administrative matters.

AAEM-PG initially filed the suit in December 2021, but the suit has gained significant attention following a story published last month by Kaiser Health News in which David Millstein, lead attorney for AAEM-PG, was quoted as saying “We are simply asking the court to ban this practice model.” A decision in AAEM-PG’s favor could require PPMs operating in California to undergo a significant restructuring to comply with the court’s interpretation of California’s CPOM laws. The outcome of the case could also lead to CPOM challenges or new legislation in other states. King & Spalding has received several inquiries from interested clients regarding the potential impact of this case and we are monitoring the developments closely. If you have any questions, please contact Tom Hawk or Gardner Armsby.

The case is American Academy of Emergency Medicine Physician Group, Inc. v. Envision Healthcare Corporation et al, Case No. 3:22-cv-00421 (N.D. Cal.).

Reporter, J. Gardner Armsby, Atlanta, +1 404 572 2760,

GAO Recommends that CMS Strengthen Hospice Reporting Requirements

GAO issued a report on December 12, 2022, that identified gaps in the reporting requirements for hospice abuse and neglect allegations as compared with requirements for extended care provided in hospitals and nursing homes. Hospice care addresses the physical and emotional needs of individuals with terminal illnesses. This care is most often provided in private homes, but can also be provided in hospitals, nursing homes, or other settings. 

Hospices are required to report allegations of abuse and neglect to the state agencies responsible for monitoring them if: (1) the alleged perpetrator is affiliated with the hospice; and (2) the hospice has verified the allegation as abuse or neglect based on an internal investigation that may take up to five days. In contrast, nursing homes and hospitals providing extended care are required to report all abuse and neglect allegations prior to conducting an internal investigation, regardless of whether the alleged perpetrator is affiliated with the hospice.

As a result, hospice care providers’ reporting may be less complete or timely than that of nursing homes and hospitals providing extended care. For example, hospices are not required to report allegations involving alleged perpetrators not affiliated with the hospice even though research suggests that most abuse of older individuals is committed in the home by an individual’s caregivers, such as family members. Therefore, GAO recommended in the report that CMS require hospice care providers to report all allegations of abuse and neglect immediately to survey agencies, regardless of whether the alleged perpetrator is affiliated with the hospice.

Reporter, Michelle Huntsman, Houston, +1 713 751 3211,


King & Spalding Webinar: A New Year, A New Day – What’s Next for Healthcare Policy and Oversight in the New Congress

King & Spalding is hosting a roundtable webinar that will take place on Thursday, January 19, 2023, at 1:00 P.M. ET. This roundtable webinar will explore how the next Congress and the Biden Administration will likely approach health policy and oversight in the next two years. Specifically, the panel will explore:

  • Guidance on navigating the new, narrowly divided Congress;
  • Opportunities, albeit limited and more challenging, for legislative action;
  • Regulatory advocacy opportunities;
  • Unwinding the COVID public health emergency and determining which policies and flexibilities remain;
  • Opportunities for “earmarks” or community project funding;
  • Areas where industry stakeholders should expect to see congressional investigations and hearings this term; and
  • What clients can do to prepare for a probing letter from Congress or an invitation to testify on the Hill.

The webinar is free to attend. Additional information and a link to registration can be found here.