News & Insights


July 2, 2018

Health Headlines – July 2, 2018

Federal District Court Rules Hospital System May Sue Medicare Advantage Plan for Underpayments – On June 22, 2018, the United States District Court for the Central District of California denied Humana’s motion to dismiss a suit brought by a large nationwide hospital system, Prime Healthcare Services (Prime). In a significant victory for Prime, the court ruled that Prime could sue Humana for breach of contract relating to Medicare Advantage underpayments. This decision is among the first in which a Federal court has allowed a healthcare provider to sue a Medicare Advantage Organization (MAO) for underpayments.

The Prime hospitals at issue were in-network with Humana and contend they were underpaid for certain Medicare Advantage claims from 2012 to 2016. Humana moved to dismiss the suit on the grounds that Prime’s claims were preempted by the express preemption provision within the Medicare Advantage statute. That provision states that all State laws and regulations “with respect to” Medicare Advantage plans are preempted, except for laws relating to licensing or plan solvency. The district court disagreed and held that the Medicare Advantage preemption statute only bars State laws in those cases in which the Medicare statute or CMS has established Federal standards. Stating that Federal law does not set standards for contractual terms between MAOs and providers, the court found that Humana could not identify a regulation governing billing disputes between an MAO and in-network providers. Therefore, Prime’s breach of contract claims are not preempted. Additionally, the court noted that if it dismissed Prime’s suit, then Prime would be left without recourse to pursue its claims because Humana’s payment decisions are not subject to administrative review by HHS.

Mark Polston and Justin Torres from the King & Spalding Washington D.C. office and Steven Park from the King & Spalding Los Angeles office served as counsel for Prime.

The case is Prime Healthcare Servs., et al. v. Humana Ins. Co., Case No. EDCV 16-1097-VAP. To view the court’s decision, click here.

Reporter, Isabella E. Wood, Atlanta, + 1 404 572 3527,

D.C. District Court Judge Strikes Down Kentucky’s Medicaid Work Requirement – Days before the Medicaid work requirement for Medicaid patients in Kentucky was to take effect, U.S. District Court Judge James Boasberg struck down the requirement in a decision issued June 29, 2018.

Following the enactment of the Affordable Care Act (ACA) and as part of Medicaid expansion, Kentucky submitted an experimental plan called “KY HEALTH” to CMS in July 2017. KY HEALTH included several components, including Kentucky HEALTH. Under the Kentucky HEALTH program, Kentucky would impose “community-engagement” requirements for the Medicaid expansion population and some of the population covered by traditional Medicaid. The new mandate would have required that, as a condition of receiving health coverage, such recipients work or participate in other qualifying activities for at least 80 hours each month. On January 12, 2018, HHS approved Kentucky’s application for Kentucky HEALTH.

In Stewart v. Azar, 18-Civ.-152 JEB (D.D.C. June 29, 2018), fifteen Kentucky residents who were enrolled in Kentucky’s Medicaid program brought an action challenging HHS’s approval of Kentucky HEALTH, asserting that the community-engagement requirement put them and others in danger of losing their health insurance.

The court explained in its June 29, 2018 decision, available here, that although HHS is afforded significant deference in approving pilot Medicaid projects like Kentucky’s, such discretion is still subject to judicial review. Judge Boasberg focused on the basic purpose of Medicaid—reimbursing certain costs of medical treatment for needy persons—and concluded that HHS was required to “adequately consider the effect of any [Medicaid] demonstration project on the State’s ability to help provide medical coverage.”  As to Kentucky HEALTH, HHS did not satisfy this requirement. The court found that this “signal omission” rendered the Secretary’s determination “arbitrary and capricious.”  The court vacated the approval of Kentucky HEALTH and remanded the matter to HHS for further review.

According to the Kaiser Family Foundation waiver tracker, available here, HHS has approved work requirements for Medicaid in four States and an additional seven States have requests awaiting HHS approval. These demonstration projects will likely draw increased scrutiny and attention in the wake of the Stewart v. Azar decision.

Reporter, Kristin Roshelli, Houston, +1 713 751 3262,

D.C. Circuit Says CMS’s Predicate Fact Rule Does Not Apply to Administrative Appeals Last week, the U.S. Court of Appeals for the District of Columbia Circuit invalidated CMS’s prohibition on appeals of so-called predicate facts. The appeal before the court, described in greater detail below, challenged the continued use of allegedly erroneously calculated 1981 standardized amounts (also known as the Federal rate). The court found that the Secretary’s so-called predicate fact regulation at 42 C.F.R. § 405.1885(a)(1), revised in 2013, applies only in the context of a reopening and not in the context of administrative appeals to the Provider Reimbursement Review Board (Board). Under the Secretary’s interpretation, if a provider filed a timely Board appeal of, e.g., a 2016 cost report determination, but within that appeal also challenged a “predicate fact,” such as the cap on the number of full-time equivalent residents eligible for reimbursement established in a prior year, the appeal of the predicate fact would be barred. The D.C. Circuit disagreed, holding that the predicate fact regulation as written applies only to reopenings and does not therefore bar appeals of predicate facts. Absent a reversal by the Supreme Court, providers across the nation should therefore now be able to appeal predicate facts without a jurisdictional bar. In addition, although the court did not directly decide the merits of the appeal before it, the court expressed skepticism regarding the accuracy of the standardized amounts. Providers that are not already challenging the standardized amount should therefore consider doing so from subsequently issued notices of program reimbursement. The case is Saint Francis Medical Center v. Azar, No. 17-5098.

A predicate fact is a “factual underpinning[] of a specific determination of the amount of reimbursement due to a provider [that] may first arise in, or be determined for, a different fiscal period that the cost reporting period under review.”  78 Fed. Reg. 74826, 75162 (Dec. 10, 2013). Such facts “are not [themselves] reevaluated annually” and might instead be a “target amount” updated annually thereafter. Id.  In analyzing a previous version of the regulation, the D.C. Circuit held that “the reopening regulation allows for modification of predicate facts in closed years provided the change will only impact the total reimbursement determination in open years,” i.e., those within the three-year window. See Kaiser Foundation Hospitals v. Sebelius, 708 F.3d 226, 232-33 (D.C. Cir. 2013). In response to Kaiser, the Secretary implemented the 2013 regulatory change, such that a decision may be reopened “with respect to specific findings on matters at issue,” including predicate facts “first determined for a cost reporting period that predates the period at issue,” and that the three-year limitation “applies to, and is calculated separately for, each specific finding on a matter at issue.”  See 42 C.F.R. § 405.1885(a)-(b).

In Saint Francis, the hospitals challenged the standardized amount calculated based on their 1981 cost reporting data (the predicate fact), but used every year thereafter to determine inpatient payment rates. The hospitals began filing Board appeals in 2005, not of the 1981 cost reporting period, but related to its effect for later periods determined within three years of 2005. The Board dismissed the appeals in light of the 2013 regulation and the district court held that the regulation governing challenges to predicate facts in reopenings also governs challenges to predicate facts in administrative appeals to the Board. As such, the hospitals’ challenges were time-barred. See Saint Francis Med. Ctr. v. Price, 239 F. Supp. 3d 237 (D.D.C. 2017).

Although the court’s prior decision in Kaiser did not address whether the reopening regulation applies to administrative appeals, the D.C. Circuit held now that it does not. Said the court:  “Reopenings and administrative appeals are conceptually different, are governed by different statutory and regulatory provisions, and, most importantly here, are governed by different limitation rules.”  This is despite statements by the Secretary in the Federal Register indicating that the 2013 amendments covered both reopenings and appeals, which the D.C. Circuit found contained no analysis and lacked “the force and effect of law.”  Ultimately, the court refused to defer to the Secretary’s interpretation of the 2013 amendments because it was “inconsistent with the text of the reopening regulation, as well as with the separate statutes and regulations governing administrative appeals.”

Because the court determined that the regulation does not apply to appeals at all, but only to reopenings, the D.C. Circuit did not address whether the 2013 amendments were arbitrary and capricious or whether applying the new regulation to Board appeals pending on the effective date would be impermissibly retroactive. However, Judge Kavanaugh filed a concurring opinion, stating that “it would seem to be the very definition of arbitrary and capricious for HHS to knowingly use false facts when calculating hospital reimbursements.”  Therefore, Judge Kavanaugh called for the regulation to be vacated altogether, indicating that it is ripe for challenge even in the context of reopenings.

The D.C. Circuit’s opinion is available here. The district court’s decision, issued March 10, 2017, is available here.

Reporters, Elizabeth Swayne, Washington, D.C., +1 202 383 8932, and Daniel (Dan) Hettich, Washington, D.C., +1 202 626 9128,

District Court Enjoins CMS from Recouping a Home Health Agency’s Alleged Overpayments Before the ALJ Hearing – On June 28, 2018, the U.S. District Court for the Northern District of Texas granted a motion for preliminary injunction which prevents CMS from recouping alleged overpayments of approximately $7.5 million from Family Rehabilitation, Inc. (Family Rehab), a Texas home health agency. Specifically, the preliminary injunction will prevent CMS from recouping the alleged overpayments while Family Rehab is waiting for an Administrative Law Judge (ALJ) hearing. The alleged overpayments of more than $7.5 million pertain to a Zone Program Integrity Contractor review that was performed in 2016 and alleged a 93-percent error rate.

Over the past several years, the Office of Medicare Hearings and Appeals has struggled under what HHS describes as an “unprecedented and sustained” increase in Medicare appeals. 81 Fed. Reg. 43790, 43792 (July 5, 2016). According to HHS, the number of requests for an ALJ hearing increased a staggering 1,222 percent from fiscal years 2009 through 2014. Id.  Although 42 U.S.C. § 1395ff generally requires a 90-day adjudication timeframe for ALJs, many providers are currently waiting several years to receive an ALJ hearing date. Providers are unable to limit recoupment following the second-level appeal.

In granting the preliminary injunction, the court determined that Family Rehab “has established a substantial likelihood of success on the merits of its procedural due process claim . . . [and] [th]ere is a high risk that Family Rehab will be erroneously deprived of its property interest because CMS will continue recouping alleged overpayments from Family Rehab without providing the statutorily mandated ALJ hearing.”  Importantly, the court acknowledged the significant Medicare appeals backlog and concluded that Family Rehab would not receive an ALJ hearing for three to five years.

Additionally, the court determined that Family Rehab established a substantial threat of immediate and irreparable harm for which no adequate remedy at law exists. The court further concluded that the “balance of harms in granting the preliminary injunction between Family Rehab and Defendants weighs in favor of granting the relief.” Specifically, the court reasoned that Family Rehab would be forced to close its doors if the preliminary injunction was not granted. Conversely, the court concluded that CMS would not similarly suffer harm because CMS will have the opportunity to recoup the alleged overpayments at a later point in time if Family Rehab’s ALJ appeal is unsuccessful.

The case is Family Rehabilitation, Inc. v. Azar, Case No. 3:17-cv-03008-K. The court’s order is available here.

Reporter, Stephanie Johnson, Atlanta, GA, +1 404 572 4629,

D.C. District Court Sides with Secretary’s FY 2005 IPPS Final Rule Regarding DSH Calculation of Dual-Eligible Exhausted Days – On June 29, 2018, the U.S. District Court for the District of Columbia decided Stringfellow Memorial Hospital et al. v. Azar by granting summary judgment to the Secretary of HHS in his defense of the FY 2005 Inpatient Prospective Payment System (IPPS) final rule (the Final Rule). The Final Rule counts patient days for dual-eligible individuals (eligible for both Medicare and Medicaid) who have exhausted their Medicare Part A days in the Medicare fraction of the DSH calculation. The plaintiff-hospitals contended that, as a result of the Final Rule, they received lesser DSH payments than the DSH amounts to which they were entitled. The plaintiffs challenged the FY 2005 Final Rule on both procedural and substantive grounds, alleging that the Final Rule was not a logical outgrowth of the proposed rule and that is was not a product of reasoned decision-making. In ruling for the Secretary on cross motions for summary judgment, the court held that the Final Rule was indeed both procedurally sound and the product of reasoned decision-making.

Background of the Challenged FY 2005 Final Rule

The disputed issue centers on whether “dual-eligible exhausted days” should be counted in the Medicare fraction or, instead, in the Medicaid fraction of the DSH calculation.

Before discussing the merits, the court discussed the complicated history leading to the Final Rule in which the Secretary badly misstated his current policy and ultimately finalized a policy to count dual-eligible exhausted days in the Medicare fraction and exclude them from the Medicaid fraction, which was the opposite of what he had proposed. The new policy was codified at 42 C.F.R. § 412.106(b)(2)(i).

The court’s decision here is different from Catholic Health Initiatives Iowa Corp. v. Sebelius, 718 F.3d 914, 916 (D.C. Cir. 2013), in which the D.C. Circuit rejected a  similar challenge regarding the Secretary’s treatment of dual-eligible exhausted days, because that case dealt with a 1997 fiscal year and the court there only upheld the exclusion of such days from the Medicaid fraction without deciding whether their inclusion in the Medicare fraction would also be licit.

The Court’s Decision Regarding the Providers’ Challenge to the Final Rule

The plaintiffs challenged the Final Rule on procedural and substantive grounds. First, the plaintiffs argued that the Final Rule is procedurally deficient under the Administrative Procedure Act (APA) and the Medicare Act because the Final Rule was not a logical outgrowth of the proposed rules, thereby depriving affected hospitals of fair notice and the ability to submit comments. Second, the plaintiffs contended that the Final Rule is substantively invalid because it was not the result of reasoned decision-making.

Procedural Grounds

The court, in siding with the Secretary, held that, “[n]otwithstanding the sloppy and confusing misstatements” in the proposed rule, the Final Rule was a logical outgrowth. In particular, the court reasoned that the 2004 proposed rule plainly identified that either dual-eligible days would be counted in the Medicare fraction or the Medicaid fraction, putting parties on notice that either one was a possible outcome. The fact that the Secretary grossly misstated its own current policy was not fatal to the Secretary’s argument. Indeed, the court noted that “[e]ven though the stated ‘current policy’ was, in fact, not the Secretary’s actual policy, the 2004 Proposed Rule gave interested parties notice that the mistaken current policy might be adopted, because “[o]ne logical outgrowth of a proposal is surely . . . to refrain from taking the proposed step.’”  The court continued, “The Secretary’s allegedly “negative[] mention” of the policy that was ultimately adopted does not preclude the Secretary from changing his outlook after reviewing comments on the virtues of that policy.”

The court distinguished its holding from that of the well-known Allina case, where hospitals successfully challenged a similar 180-degree reversal by the Secretary. In Allina, the Secretary proposed to “clarify” that once a beneficiary elects Medicare Part C, those patient days attributable to the beneficiary should not be included in the Medicare fraction but should instead be included in the Medicaid fraction. In the corresponding final rule, however, the Secretary instead adopted a policy to include the patient days for Part C beneficiaries in the Medicare fraction—the exact opposite of the policy the Secretary had proposed to clarify. The D.C. Circuit concluded that this result was not a logical outgrowth of the Secretary’s proposed rule. In the present case, however, the court found that the 2004 proposed rule clearly indicated that the Secretary was “proposing to change our policy” which was unlike the mere “clarification” in the Allina case. The court further reasoned that the proposal at issue here put interested parties on notice not only that a change was possible but also that the proffered change might be rejected in favor of the alleged current policy. The court therefore concluded that the Final Rule was promulgated with adequate notice and comment procedures and is not procedurally defective.

Substantive Grounds

The plaintiffs also argued that the policy finalized in the Final Rule was arbitrary and capricious agency action. Under this framework, the court explained that agencies are free to change their existing policies as long as they provide a reasoned explanation for the change, which means the agency must at least “display awareness that it is changing position” and “show that there are good reasons for the new policy.”

First, the plaintiffs argued that the Secretary did not provide much by way of an explanation for his about-face in proposing to count exhausted days in the Medicare fraction. On this point, the court found that the Secretary’s responses to relevant comments in the rulemaking were indicative of a reasoned decision. Second, the plaintiffs argued that the Secretary relied on a flawed understanding regarding the policy’s impact on DSH patient percentage calculations. However, the court disposed of this argument by finding that the Secretary had provided sufficient discussion in the rulemaking to demonstrate that he was aware of the effects of counting dual-eligible individuals in either the Medicare or Medicaid fractions. Most notably, the plaintiffs argued that the Secretary could not have provided adequate notice of a change in policy because the Secretary himself was confused about his then-current policy and his new policy. The court determined that while the Secretary could have been clearer throughout the rulemaking process regarding the current policy and the proposed changes to the current policy, the Secretary did acknowledge that the policy was changing, as required by the APA, by acknowledging that he “inadvertently misstated” the current policy in the 2004 proposed rule and posting on the CMS website regarding that misstatement. For these reasons, the court held that the challenged portion of the Final Rule was not the product of arbitrary and capricious rulemaking and is therefore valid.

The court’s memorandum opinion is available here.

Reporter, Michael L. LaBattaglia, Washington, D.C., + 1 202 262 5579,

California Enacts Sweeping Privacy Law --  On June 28, California’s Governor Jerry Brown signed into law the California Consumer Privacy Act of 2018 (AB 375), a broad privacy law modeled after the new European General Data Protection Regulation. The new law, which is now the broadest privacy law in the U.S., will go into effect on January 1, 2020. Under the law, businesses that collect personal information from consumers will be required to comply with consumers’ requests to access, share, cease selling or delete the information. The law applies to businesses that do business in California (or control or are controlled by a business doing business in California) and either have over $25 million in revenue, receive the personal information of 50,000 or more consumers or devices, or derive 50 percent or more annual revenues from selling consumers’ personal information. The law does not apply to protected health information that is governed by HIPAA. The law directs the California Attorney General to solicit public comments and promulgate regulations implementing the law’s regulatory and enforcement framework before January 1, 2020. The text of the AB 375 is available here.

Glen Reed Receives Lifetime Achievement Award at 2018 Georgia Legal Awards – During a ceremony held last week at the Georgian Terrace Hotel in Atlanta, King & Spalding partner Glen Reed was honored with a Lifetime Achievement Award at the 2018 Georgia Legal Awards presented by the Daily Report. The Daily Report published a profile of Mr. Reed in connection with the award, which is available here.

11th Annual King & Spalding Medical Device Summit – King & Spalding, in conjunction with FDANews, will host the 11th Annual Medical Device Summit on September 6, 2018, in Chicago. Registration opens in June. Subjects will include regulatory, reimbursement, enforcement, compliance, commercial, litigation, cybersecurity and other important topics for medical device manufacturers in the coming year. For more information please click here.