Health Headlines – July 21, 2025

CMS Issues CY 2026 Medicare Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System Proposed Rule

On July 15, 2025, CMS issued a proposed rule with updates to the Medicare payment rates for the Hospital Outpatient Prospective Payment System (OPPS) and the Medicare Ambulatory Surgical Center (ASC) payment system for calendar year 2026 (the Proposed Rule). In the proposed rule, CMS seeks to expand site neutral payments for drug administration services and requests comments on expanding site neutral payments in other areas. Additionally, the agency plans to unpackage skin substitute products from the application services and establish APCs based on product characteristics rather than based on stated prices for provision of these products when they are used during a covered application procedure under the OPPS. Finally, CMS proposes updates to the hospital price transparency regulations, the inpatient only list (IPO), and graduate medical education accreditation. This article provides an overview of CMS’s proposals in the Proposed Rule. Comments are due by September 15, 2025.

Updates to OPPS and ASC Payment Rates 

The Proposed Rule updates the OPPS payment rates by 2.4% for hospitals that meet applicable quality reporting requirements. This 2.4% update factor is based on the projected hospital market basket percentage increase of 3.2%, reduced by a reductivity adjustment of 0.8%. CMS estimates that these new payment rates would result in increased total payments to OPPS providers of approximately $100 billion for CY 2026.  

For CY 2026, using the hospital market basket update, CMS proposes an update factor to the ASC rates of 2.4% as well. The update applies to ASCs meeting relevant quality reporting requirements. This update is based on the proposed hospital market basket percentage increase of 3.2%, reduced by a reductivity adjustment of 0.8%. CMS estimates that these rates will result approximately $9.2 billion in total payments to ASCs in CY 2026, an increase of approximately $480 million compared to what was estimated CY 2025. 

ASC Market Basket Update 

As mentioned above, the Proposed Rule extends the five-year market basket update that was proposed in CY 2019. In the CY 2019 OPPS/ASC final rule with comment period, CMS finalized a proposal to apply the hospital market basket update to ASC payment system rates for an interim period of five years (CY 2019 through CY 2023) while CMS determined the impact of the higher update factor on the migration of services from the hospital outpatient setting to the ASC setting. In light of the COVID-19 Public Health Emergency (PHE), CMS extended the application of the hospital market basket update an additional two years in the CY 2024 OPPS/ASC final rule with comment period, that is, through CY 2024 and CY 2025 so that CMS could analyze claims data further removed from the effects of the COVID-19 PHE. 

In this Proposed Rule, CMS seeks to extend its utilization of the hospital market basket update as the update factor for the ASC payment system one additional year, through CY 2026, while CMS continues to study the migration of outpatient surgical procedures. 

CY 2026 Prospective Adjustment to Payments for Non-Drug Items and Services to Offset the Increased Payments for Non-Drug Items and Services Made in CY 2018 Through CY 2022 as a Result of the 340B Payment Policy  

The 340B Final Remedy rule finalized changes to the calculation of the OPPS conversion factor applicable to non-drug items starting to CY 2026. That rule codified a 0.5% reduction in the OPPS conversion factor applicable to non-drug items and services that would remain in effect until the estimated aggregate payment reduction reached the $7.8 billion of increased non-drug item and services payments made from CY 2018 through CY 2022, which CMS estimated would occur in CY 2041. This prospective offset aimed to balance the goal of restoring hospitals to their financial position had the original 340B policy never existed, while avoiding burdening them with an immediate single year recovery.  

Now, CMS has determined a shorter timeframe to be more appropriate, and the Proposed Rule revises the annual offset percentage for non-drug items and services from 0.5% to 2% effective CY 2026.  This 2% reduction would remain in effect until the estimated payment reduction reaches $7.8 billion, which CMS estimates will occur in CY 2031 (ten years earlier than initially implemented).  

Skin Substitutes 

In the CY 2014 OPPS/ASC Final Rule, CMS packaged skin substitute products and finalized a method to divide skin substitutes into a high-cost group and a low-cost group.

The Proposed Rule changes that methodology. In the Proposed Rule, CMS plans to unpackage the skin substitute products from the application services and establish APCs based on product characteristics rather than based on stated prices for provision of these products when they are used during a covered application procedure under the OPPS (CPT codes 15271-15278).  

CMS is also proposing to group skin substitutes that are not drugs or biologicals into three FDA regulatory categories, noting that it believes grouping and paying for skin substitute products based on their relevant product characteristics recognizes the clinical and resource differences in product types and would incentivize competition to create more innovative products. For CY 2026, CMS proposes using a single payment rate for the three categories of skin substitute products (an initial payment rate of $125.38), but it intends to propose payment rates that differentiate between the three FDA categories in future years.  

Inpatient Only (IPO) List  

The Proposed Rule seeks to phase out the IPO list over a 3-year period, starting with removing 285 mostly musculoskeletal procedures, to allow for services to be paid by Medicare in a hospital outpatient setting when clinically appropriate. CMS intends for this transition to give physicians greater flexibility in determining the most appropriate site of service.   

Site Neutrality Proposals – Drug Administration Services 

The Proposed Rule seeks to expand the site neutral payment policy for drug administration services. Specifically, CMS proposes to pay for drug administration services furnished in grandfathered off-campus hospital outpatient departments at a site-neutral rate of 40% of the OPPS rate.  

Although the Proposed Rule only implements site neutral payments for drug administration services, it requests comments on whether CMS should expand site-neutral payments to clinic visit services provided in on-campus hospital outpatient departments (“HOPDs”).   

Market-Based MS-DRG Relative Weight Data Collection and Methodology Proposal 

The Proposed Rule requires hospitals to report certain market-based payment rate information on their Medicare cost report. CMS is proposing to collect from hospitals the median payer-specific charges that they have negotiated with Medicare Advantage organizations and disclosed under CMS’ hospital price transparency rules and then use the data to help determine relative Medicare payment rates for inpatient hospital services. In doing so, CMS hopes to reduce Medicare’s reliance on the hospital chargemaster and support the development of a market-based approach to payment under the Medicare FFS system.  

CMS is also seeking comment on how market-based approaches such as this one could be utilized to improve additional Medicare FFS payment systems. 

Graduate Medical Education (GME) Accreditation 

The Proposed Rule prohibits accreditors to require as part of accreditation, or otherwise encourage institutions to put in place, diversity, equity, and inclusion programs that encourage unlawful discrimination on the basis of race or other violations of Federal law. CMS states that the purpose of this Proposed Rule is to ensure that GME accreditation for approved medical residency programs complies with applicable laws related to race-based admission policies and to improve the accreditation process.  

Additionally, CMS notes that the Secretary may certify other organizations as accreditors to increase the potential for competition in the accreditation space and improve the quality of the accreditation process. 

Hospital Price Transparency (HPT) 

Standard Charges – Allowed Amounts  

Under the hospital price transparency regulations, a hospital must make public its standard charges, and when the standard charge is based on a percentage or algorithm, the hospital must encode the “estimated allowed amount” in dollars for that item or service in the machine-readable file. The estimated allowed amount is the “average dollar amount that the hospital has historically received from a third party payer for an item or service.” 45 C.F.R. § 180.20. CMS proposes to replace the requirement to encode the estimated allowed amount with the following three new data elements:  

• “Median allowed amount’’ would be defined as the median of the total allowed amounts the hospital has historically received from a third party payer for an item or service for a time period no longer than the 12 months prior to posting the machine-readable file. Should the calculated median fall between two observed allowed amounts, the median allowed amount is the next highest observed value. 

• ‘‘Tenth (10th) percentile allowed amount’’ would be defined as the 10th percentile of the total allowed amounts the hospital has historically received from a third party payer for an item or service for a time period no longer than the 12 months prior to posting the machine-readable file. Should the calculated percentile fall between two observed allowed amounts, the 10th percentile allowed amount is the next highest observed value. 

• ‘‘Ninetieth (90th) percentile allowed amount’’ would be defined as the 90th percentile of total allowed amounts the hospital has historically received from a third party payer for an item or service for a time period no longer than the 12 months prior to posting the machine-readable file. Should the calculated percentile fall between two observed allowed amounts, the 90th percentile allowed amount is the next highest observed value. 

The “total allowed amount” figure used in each of these proposed definitions would be derived from the gross charge minus contractual adjustments and consist of the portion billed to a payer for a particular plan and the portion, if any, billed to the patient. The amount should reflect the total amount the hospital was reimbursed for the item or service (or service package). CMS proposes that hospitals would determine the ‘‘total allowed amount’’ from EDI 835 ERA transaction data from no longer than 12 months prior to posting the machine-readable file.  

Other Machine-Readable File Updates   

Current hospital price transparency regulations require each hospital to affirm in its machine-readable file that the hospital, to the best of its knowledge and belief, has included all applicable standard charge information in accordance with the requirements of 45 C.F.R. Part 180 and that the information displayed is true, accurate, and complete as of the date indicated in the file.  CMS proposes to supplant the existing affirmation statement as follows:  

• Hospitals would be required to include in their machine-readable files the following attestation: “The hospital has included all applicable standard charge information in accordance with the requirements of § 180.50, and the information encoded is true, accurate, and complete as of the date in the file. The hospital has included all payer-specific negotiated charges in dollars that can be expressed as a dollar amount. For payer-specific negotiated charges that cannot be expressed as a dollar amount in the MRF or not knowable in advance, the hospital attests that the payer-specific negotiated charge is based on a contractual algorithm, percentage or formula that precludes the provision of a dollar amount and has provided all necessary information available to the hospital for the public to be able to derive the dollar amount, including, but not limited to, the specific fee schedule or components referenced in such percentage, algorithm or formula.” 
  
  
• Hospitals would encode the name of the hospital chief executive officer, president, or senior official designated to oversee the encoding of true, accurate, and complete data as directed in § 180.50(a)(3)(iii).

• Separately, CMS proposes that hospitals reporting a unique identifier, specifically their NPI(s), in the machine-readable file.

Enforcement Updates 

Under current hospital price transparency regulations, hospitals can appeal a civil monetary penalty (CMP) within 30 days of issuance of the notice of a CMP. CMS proposes that a CMP would be reduced by 35 percent should a hospital submit to CMS a written notice requesting to waive its right to a hearing under § 180.100 within 30 calendar days of the date of the notice of imposition of the CMP. CMS also proposes that if a hospital waives its right to appeal a CMP and receives a 35 percent reduction, the hospital:  

• Would not be eligible to receive a 35 percent reduction on any CMPs issued that result from the same instance(s) of noncompliance (i.e., continuing violations); and 

• Would waive its right to appeal CMPs for any such continuing violations. 

CMS also proposed that the agency would decline to make available to hospitals the opportunity to have a CMP amount reduced in certain situations. These include:  

• When a hospital has not affirmatively waived its right to a hearing in accordance with the procedures specified at proposed § 180.90(c)(4); 

• When CMS imposes upon a hospital a CMP for noncompliance going to the core of the hospital price transparency requirements—for example, failing to make public either a machine-readable file 45 C.F.R. § 180.40(a) or any shoppable services in a consumer-friendly format (either in the form of a shoppable services file or an internet price estimator tool) as required in 45 C.F.R. § 180.40(b)—the hospital would be ineligible to avail itself of such an opportunity.

The Proposed Rule can be found here, and the CMS fact sheet is available here. Comments are due by September 15, 2025.  

Reporters, Morgan Cronin, Atlanta, +1 404 572 2795, mcronin@kslaw.com, Ahsin Azim, Washington, D.C., +1 202 626 5516, aazim@kslaw.com

CMS Issues CY 2026 Physician Fee Schedule Proposed Rule

On July 14, 2025, CMS issued a proposed rule that identifies and seeks public comment on a variety of proposed changes to the Medicare Physician Fee Schedule (PFS), Medicare Shared Savings Program Requirements, and Medicare Prescription Drug Inflation Rebate Program for Calendar Year (CY) 2026 (the Proposed Rule). The proposed updates would, among other things, update payment models to attempt to award efficiency, make permanent many COVID-era flexibilities for telehealth, and provide guidance regarding fair market valuations in connection with bona fide service fees used to calculate drug manufacturer’s Average Sales Price. If finalized, the proposed changes would take effect January 1, 2026. Comments are due by 5:00 p.m., September 12, 2025.

CY 2026 PFS Rate Setting and Conversion Factor

Under the Proposed Rule, beginning in CY 2026 there will be two conversion factors which convert relative value units (RVUs) (the resources typically used to furnish a service) to payment rates. One of the conversion factors will be used for qualifying alternative payment model participants (QPs), and updated by +0.75 percent, while the other one will be used for physicians and practitioners who are not QPs and only updated by +0.25 percent. The larger update for the QP conversion factor appears intended to reward providers participating in alternative payment models which have features to ensure accountability for quality and cost of care. Additionally, there will be a one-year increase of +2.50 percent for CY 2026 stipulated by statute, and an estimated adjustment of +0.55 percent to account for proposed changes in work RVUs for certain services.

Efficiency Adjustment

Over the past several years, CMS has expressed concern and solicited comments regarding the PFS overvaluing non-time-based services due to efficiency gains over time. Literature and comments offered in response to past proposed rules on the PFS have suggested that such services become overvalued due to the combination of medical practice efficiencies over time and delays in code re-valuation, which some estimates suggest occur only every 17-25 years. To address the likelihood of overvaluation of non-time-based services, the Proposed Rules makes an efficiency adjustment to the work RVU and corresponding intraservice portion of physician time for non-time-based services in CY 2026, and then periodically every three years thereafter. The Proposed Rule uses a sum of the past five years of the Medicare Economic Index productivity adjustment (which is calculated by the CMS Office of the Actuary) to calculate the efficiency adjustment, which would result in a -2.5% efficiency adjustment for CY 2026.

Practice Expense

Currently, the practice expense (PE) methodology primarily relies on AMA’s Physician Practice Information (PPI) survey data from 2008 concerning specialty-specific practice costs. In recent years, CMS has expressed interest in developing a roadmap for updating the PE methodology to account for the changed healthcare landscape and solicited comments regarding the same.

The most significant change in the Proposed Rule regarding the PE methodology is a proposed reduction in the portion of the facility indirect PE RVUs allocated based on work RVUs to only half the amount allocated to non-facility indirect PE RVUs. This adjustment is intended to account for physicians practicing in facilities being less likely to also maintain an office-based practice.

The Proposed Rule indicates that further changes to the PE methodology are likely to occur over time. For example, while the Proposed Rule does incorporate the findings of the AMA’s PPI survey data from 2024 due to concerns with the data, the Proposed Rule solicits comments on CMS’s proposed updates to the PE methodology because CMS intends to further refine that methodology.

Telehealth Services

CMS has several proposals under the PFS for CY 2026 related to telehealth payments.

First, CMS proposes simplifying the review process for adding services to the Medicare Telehealth Services list in several aspects. Rather than a five-step process that requires consideration of whether a service is comparable to already approved telehealth services or clinically equivalent to the in-person service, the proposed three-step process will consider only whether a service is (1) separately payable under the PFS, (2) inherently a face-to-face service, and (3) capable of being furnished via audio-video communications technology. Further, the review process will no longer include a distinction between provisional and permanent services. 

Second, CMS proposes permanently removing frequency limitations on furnishing services via telehealth for subsequent inpatient visits (CPT 99231-99233), subsequent nursing facility visits (CPT 99307-99310), and critical care consultations (G0508-G0509).

Third, CMS proposes permanently adopting a definition of “direct supervision” that allows virtual presence through “immediate availability” via audio/video real-time communications technology to meet this requirement for all services described under § 410.26, i.e. “incident to” services,” except for higher-risk surgeries that have a global surgery indicator of 010 or 090.

Fourth, CMS proposes transitioning back to its pre-PHE policy requirement for teaching physicians to be physically present to bill services provided that involve residents, with virtual present remaining permissible pursuant to a rural exception.

Policies to Improve Care for Chronic Illness and Behavioral Health Needs 

Consistent with the Administration’s Executive Order, “Establishing the President’s Make America Healthy Again Commission,” the Proposed Rule is focused on improving care for chronic disease in several aspects.

First, the Proposed Rule establishes three new G-Codes to be billed when complementary behavioral health integration (BHI) or psychiatric Collaborative Care Model (CoCM) services are provided in conjunction with Advanced Primary Care Management (APCM) services. This is intended to facilitate integration of behavioral health with primary care, thus addressing chronic behavioral health conditions.

Second, the Proposed Rule broadly solicits comments and feedback as to how CMS could improve its support management of the prevention and management of chronic disease, including the identification of services that would address the root cause of disease, chronic disease management, and related prevention.

Skin Substitutes

Currently, most skin substitutes are paid using the average sales price-based payment methodology, which provides a unique billing code and payment limit for each skin substitute product. The Proposed Rule changes this payment methodology by proposing that skin substitute products are paid as “incident-to supplies” in the physician office and hospital outpatient settings (“incident-to” is a term of art that means an integral, although incidental, part of the physician’s professional service). In both settings of care, the payment for skin substitutes will not be bundled into the procedure payment and instead will be a separate payment for the product in addition to the payment for the skin substitute application procedure payment.

CMS proposes to create three categories of products for payment as supplies, relying on FDA regulatory pathway: (1) PMA (pre-market approvals), (2) 510(k) and (3) 361 HCT/P (human cells, tissues and cellular and tissue-based products). For any biological products that are listed under section 351 of the PHS Act, the current ASP methodology would continue to apply. The proposed payment policy for skin substitutes in hospital outpatient settings is provided in the CY 2026 Outpatient Prospective Payment System/ Ambulatory Surgical Center proposed rule here.

The initial CY 2026 payment rates for each of the three categories of products were initially calculated using the volume-weighted average Q4 2024 ASP for products in the category. If ASP was not available, CMS used the hospital MUC (geometric mean unit cost).  CMS noted, however, that when taking into account product utilization across both physician office and hospital outpatient settings, this created a “rank order anomaly” such that PMA products had the lowest rate and 361 products had the highest rate. In response, CMS is proposing to use a single initial payment rate across all three categories for CY 2026 to avoid an underestimation with the resources required. CMS is using the highest of the three product category rates for hospital OPPS data, which is the rate for 361 products. Thus, the initial CY 2026 payment rates for all three categories is $125.38 per sq cm.

The payment rates would then be updated on an annual basis through rulemaking using the most recently available calendar quarter of ASP data (or potentially multiple quarters of ASP data), if available. If ASP data is not available, the hospital MUC will be used. If MUC is not available, the product’s WAC will be used. If WAC is not available, the payment rate will be based on 89.6% of AWP. This data will be used to determine a weighted average per-unit cost by group based on all products in the category in both physician office and hospital settings of care.

CMS will continue to assign specific HCPCS codes to skin substitutes, but certain products (361, 510(k), de novo, PMA products) will now be considered through the bi-annual coding process that includes a public meeting. 

Drugs and Biological Products Paid Under Medicare Part B

Currently, the manufacturer’s average sales price (ASP) is used to determine Part B drug payment limits. CMS is proposing new guidance regarding pricing concessions and bona fide service fees (BFSFs). With regards to pricing concessions and bundled discounts, CMS is adopting a definition of bundled arrangements which will result in pricing discounts being allocated proportionally.

With regards to BSFSs, in the proposed rule, CMS appears to be proposing a new level of oversight of manufacturers with respect to fair market value (“FMV”) determinations of BSFS, with such changes likely aimed at eliminating potential conflicts of interest and ensuring that FMV determinations are unbiased and accurate. Specifically, under the proposed rule, CMS has proposed the following:

1. For fees paid by a manufacturer to an entity that do not vary directly with the amount of drug sold or price of a manufacturer’s drug, FMV determinations must be based on comparable market transactions that generally reflect the current market conditions or the cost of service plus a reasonable markup to the total cost.
2. For fees paid by a manufacturer to an entity that do vary directly with the amount of drug sold or price of a manufacturer’s drug, CMS would require:
   
   
1. The FMV must be determined by using the cost of the service and adding a reasonable markup to the total cost (or if any material portion of cost data is unavailable, by using a market-based approach based on verifiable market data until sufficient cost data are available), and
2. The FMV assessment must be conducted by an independent third-party valuator and documented with a description of the methodology used.
3. All FMV assessments must be conducted by an independent third-party valuator – one who does not have any financial relationship (other than the arrangement to conduct the FMV analyses) with the with either party to the arrangement and no stake in the outcome of the valuation.

Manufacturers must conduct periodic updates of any FMV analyses for service arrangements that are ongoing, at a frequency no less than the renewal frequency of the arrangement.

Rural Health Clinics (RHCs) and Federally Qualified Health Centers (FQHCs) 

The Proposed Rule proposes changes to align payment to RHCs and FQHCs largely consistent with the proposals with regards to telehealth services, chronic illness, and behavioral needs. First, for RHC and FQHC services requiring “direct supervision”, CMS is proposing the permanent adoption of a definition that allows virtual presence through “immediate availability” via audio/video real-time communications technology, consistent with CMS’s expansion of the “direct supervision” definition in other aspects. Second, CMS is proposing that the additional codes proposed for APCM that the three new G-Codes to be billed when BHI or CoCM services are provided in conjunction with APCM services be adopted for RHC and FQHC services as well.

Medicare Prescription Drug Inflation Rebate Program

Pursuant to the Inflation Reduction Act of 2022 (IRA), and its requirements under which inflation rebates are owed by drug manufacturers if they raise their prices for certain drugs payable under Part B and/or Part D faster than inflation, the Proposed Rule includes new policies for the related Inflation Rebate Programs.

For the Medicare Part B Drug Inflation Rebate Program, the Proposed Rule proposes news policies to be used when standard information is not available. Specifically, CMS proposes to (1) identify the payment amount benchmark quarter if data needed to calculate the payment amount are not available, (2) describes CMS’s method for calculating the payment amount in the payment amount benchmark quarter if a published payment limit is not available, and (3) describes CMS’s method for calculating the payment amount in the payment amount benchmark quarter if there is no published payment limit and neither positive ASP nor positive WAC data are available in the ASP Data Collection System.

For the Medicare Part D Drug Inflation Rebate Program, the Proposed Rule proposes to use a claims-based methodology to implement the IRA’s requirement that CMS exclude drugs provided pursuant to the 340B program from the number of units used to calculate the total rebate amount for Part D. Consistent with this, CMS proposes establishing a 340B repository to receive submissions of certain data elements from Part D 340B claims.

The proposed rule is available here, and the fact sheet is available here.

Reporters, Christopher C. Jew, Los Angeles, + 1 213 443 4336, cjew@kslaw.com; Lindsay Greenblatt, Los Angeles, + 1 213 218 4032 , lgreenblatt@kslaw.com; Michelle Huntsman, Houston, +1 908 601 0818, mhuntsman@kslaw.com

First Circuit Court of Appeals Affirms Dismissal of Qui Tam Complaint Applying “But-For” Causation Standard in FCA Case Alleging Unlawful Kickbacks 

On June 27, 2025, the United States Court of Appeals for the First Circuit affirmed a district court’s dismissal of a qui tam complaint alleging violations of the Anti-Kickback Statute (AKS) and the federal False Claims Act (FCA) based on allegedly improper financial incentives a dialysis provider gave hospitals and physicians to induce referrals to its clinics. In affirming the dismissal, the First Circuit applied the defense-friendly “but-for” standard of causation it recently adopted in United States v. Regeneron Pharmaceuticals. The First Circuit held that the relator in the case failed to adequately plead that the claims submitted to the government would not have occurred “but-for” the allegedly unlawful kickbacks. The case is further evidence of a trend of courts requiring whistleblowers to meet demanding pleading requirements under the AKS and the FCA. 

Background

Relator Martin Flanagan worked for Fresenius, a major dialysis provider, for 29 years. In March 2014, Flanagan filed a qui tam complaint in the District of Maryland, alleging that Fresenius engaged in a kickback scheme to induce hospitals with which it contracted to refer patients to Fresenius’s outpatient clinics. To induce those referrals, Flanagan alleged that Fresenius (1) limited and did not pass on costs and fees to hospitals under its contracts with them; (2) hired hospital nephrologists to serve as medical directors at Fresenius outpatient facilities; (3) provided free educational and administrative services to hospitals; (4) entered lease agreements with physicians whereby Fresenius either paid above-fair market rents or charged below-fair market lease rates to physicians; and (5) entered into joint venture agreements with physicians that allowed physicians to share in the profits and losses of outpatient dialysis facilities. Flanagan alleged that Fresenius received patient referrals resulting from these actions, and that those kickbacks violated both the federal Anti-Kickback Statute and served as a predicate act for violations under the False Claims Act.

The case underwent several procedural developments over the next eight years, including a transfer to the District of Massachusetts, three motions to dismiss, and Flanagan’s filing an amended complaint. Ultimately, the Massachusetts District Court granted Fresenius’ motion to dismiss Flanagan’s amended complaint on multiple independent grounds. The district court determined that Flanagan failed to describe false claims resulting from the alleged kickback scheme with the requisite level of specificity under Rule 9(b) and that Flanagan failed to state a claim because his amended complaint did not contain “particularized allegations of claims for payment arising from that scheme.” 

First Circuit’s Analysis

On appeal to the First Circuit, Flanagan attempted to surmount the Rule 9(b) hurdle by arguing he adequately pled but-for causation by alleging “specific compensation relationships with specific physicians which were intended to and did result in referrals.” Flanagan pointed to a specific physician to whom Fresenius allegedly provided medical director positions and argued that the physician’s compensation for those roles was meant to induce referrals to Fresenius clinics. Flanagan also argued that his amended complaint provided detail about how renewing the physician’s contract was critical to Fresenius. 

The First Circuit rejected these arguments. The court noted that under the First Circuit’s recent decision in United States v. Regeneron Pharmaceuticals, the proper standard to determine whether a false claim “resulted from” an illegal kickback is the but-for causation standard. King & Spalding previously reported on the Regeneron opinion here. Applying Regeneron, the First Circuit concluded that Flanagan’s allegations failed to meet the but-for standard of causation. It reasoned that under the but-for standard, Flanagan’s allegations about Fresenius providing medical directorships to a particular physician were not sufficient to conclude that the physician would have made referrals to Fresenius even if he had not been given those medical director positions.

Takeaways

The First Circuit’s affirmance in this case reflects a continued trend of courts requiring relators to meet demanding pleading requirements when bringing FCA cases based on alleged AKS violations. The First Circuit is joined by the Sixth and Eighth circuits in requiring “but for” causation to support an allegation that a kickback caused a false claim. As the First Circuit noted, “further details” are often necessary to survive court scrutiny on a motion to dismiss. 

The case is United States ex rel. Flanagan v. Fresenius Medical Care Holdings, Inc.  No. 23-1305 (1st Cir. June 27, 2025).  A copy of the court’s opinion is available here.

Reporter, Doug Comin, Atlanta, GA, +1 404 572 3525, dcomin@kslaw.com.

NJ Supreme Court Held that Charity Care is Not Unconstitutional Taking

On July 16, 2025, the New Jersey Supreme Court unanimously ruled that the state’s charity care requirement—which mandates that hospitals must treat patients regardless of their ability to pay—does not amount to unconstitutional per se or regulatory taking. The Court upheld a lower court’s dismissal of a lawsuit brought by fourteen hospitals, both nonprofit and for-profit, who argued that the charity care requirement forced them to give up their property without just compensation.

The hospitals challenged the charity care program, arguing that that the subsidies provided under the program are insufficient to cover care costs and that complying with the law amounts to a taking. The Court disagreed, noting that hospitals maintain control of their resources and make their own allocation decisions.

Justice Douglas M. Fasciale, writing for the court, emphasized that while it may seem unfair for hospitals to bear these costs, setting policy is the legislature’s role. The charity care program does not require hospitals to hand over or physically set aside property for the state or others, nor does it deprive them of economically beneficial use of their property.

New Jersey Attorney General Matthew Platkin praised the decision, saying it supports the principle that no one should be denied care due to inability to pay. The hospitals’ attorneys said they are considering appealing to the U.S. Supreme Court, arguing the ruling contradicts recent federal decisions on physical takings.

The case is Englewood Hospital & Medical Center et al. v. The State of New Jersey et al., case number 089696. The opinion is available here.

Reporter, Jenna M. Anderson, Los Angeles, +1 213 443 4328, janderson@kslaw.com

Ninth Circuit Decision Clarifies EKRA Enforcement

On July 11, 2025, the Ninth Circuit issued a decision clarifying the scope of Eliminating Kickbacks in Recovery Act (EKRA). In affirming a Northern California-based medical testing laboratory’s convictions under EKRA, the Ninth Circuit provided valuable insight into what constitutes a violation of EKRA, a law that has not historically been subject to many enforcement actions.

Congress passed EKRA in 2018. EKRA, in relevant part, makes it illegal to “pay or offer renumeration … to induce a referral of an individual to a … laboratory.” 

In U.S. v. Schena, the Ninth Circuit affirmed Mark Schena’s (the owner of the laboratory) convictions for violating EKRA. Schena’s laboratory conducted blood tests for allergy testing and engaged marketers to promote this service to potential patients. During the COVID-19 pandemic, the laboratory shifted its focus to testing blood for COVID-19 and continued to engage marketers to raise awareness of the laboratory’s capabilities. The Court held that the laboratory’s billing practices violated EKRA because (along with other misconduct) blood samples were tested for both COVID-19 and allergies to inflate collections without a physician order. Further, the allergy tests tested for a full 120-panel of allergens, even though this was not medically necessary in most cases. Marketers promoting the laboratory’s testing were not paid on a salary or given written contracts, instead marketers were paid a percentage of the revenue that they were able to bring in.

The laboratory moved to dismiss the violations of EKRA reasoning that percentage payments were only made to marketing intermediaries and not persons who were directly making referrals to patients (e.g., physicians). The main issues discussed in the decision include: (1) whether EKRA applies to payments made to marketing intermediaries, as opposed to the referring doctors or persons who otherwise interact directly with patients; and (2) if payments made to marketing intermediaries are covered, what it means to “induce a referral” in the context of that type of payment relationship.

On the first issue, the court held that EKRA applies to marketing intermediaries who interface with those who refer services to patients. The court clarified that there is no requirement under EKRA that payment be made to a person who interfaces directly with patients. The court explained that the phrase “to induce a referral of an individual” refers to the ultimate object of the inducement and does not need to directly relate to patient inducement. According to the court, this means “a third party such as a marketer could still induce a patient referral through a doctor or other medical professional.”

Turning to the second issue, the court first clarified that “a percentage-based compensation structure for marketing agents, without more, does not violate” EKRA. In reaching this conclusion, the court pointed out that, at oral argument, “the government itself agreed that a percentage-based payment to a marketer is not per se unlawful under EKRA.” 

The court continued that “wrongful inducement exists when a defendant pays remuneration to a marketing agent to have him unduly influence doctors’ referrals through false or fraudulent representations about the covered medical services.” As applied to the facts in Schena, the court held, “at a minimum, when percentage-based payments are made to marketing agents who are directed to mislead those making the referrals about the nature of and need for the covered medical services, those payments would violate EKRA.” Critically, the court acknowledged, “[f]uture cases will be needed to give content to the specific circumstances in which payments to a marketing agent reflect a wrongful effort to unduly influence the decisions of doctors and medical professionals making referrals.”

The case is United States of America v. Mark Schena, United States Court of Appeals for the Ninth Circuit, Case No. 23-2989,and the opinion is available here.

Reporter, Kimberly Rai, New York, +1 212 556 2198, krai@kslaw.com

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