News & Insights


November 19, 2018

Health Headlines – November 19, 2018

CMS Outlines Support for Innovative Service Delivery Models and Provides Demonstration Project Opportunities – On November 13, 2018, CMS issued a letter to State Medicaid Directors, SMD #18--011 (Letter), announcing strategies to support innovative service delivery systems for adults with serious mental illness (SMI) and children with a serious emotional disturbance (SED).  For that same population, the Letter also announced that CMS is making available demonstration projects under its waiver authority in section 1115(a) of the Social Security Act (Waiver).  The Letter represents CMS’s current strategies to improve opportunities for Medicaid beneficiaries with serious mental conditions.

Section 12003 of the 21st Century Cures Act mandated that CMS publish the Letter and outline the opportunities for improving care for beneficiaries with SMI and SED.  CMS indicates that improving care for such Medicaid beneficiaries is a top priority and that the Letter provides the framework for working with states to improve care.  The Letter identifies a host of research indicating that serious mental health conditions can have detrimental impacts on the lives of individuals with SMI or SED, including their families and caregivers.  Moreover, the body of research indicates, among other things, a gap between the presentment of conditions and first receiving treatment for SMI or SED.  For those reasons and others, CMS hopes the Letter helps improve the care available to adults with SMI and children with SED.

The Letter first addresses the strategies for supporting innovative service delivery systems for adults with SMI and children with SED under existing authorities.  One major strategy mentioned in the Letter is earlier identification and engagement in treatment, because individuals with SMI or SED are often first identified as needing treatment in settings other than specialized mental healthcare settings (e.g., schools, hospitals, and criminal justice systems).  Therefore, the Letter recommends the development of more robust referral networks to mental health providers, including improving data-sharing capabilities among such providers.  The Letter states, “[C]osts associated with developing or maintaining a referral network between other systems and settings . . . with mental health providers may be reimbursable as administrative costs [and that] [s]tate Medicaid agencies should contact CMS for additional information.”

Other strategies mentioned in the Letter include integrating mental healthcare into primary care settings and improving access to crisis stabilization services.  Additionally, the Letter includes an appendix, which contains a comprehensive table summarizing key services, strategies, and potential Medicaid authorities that cover certain additional services and activities for improving care for adults with SMI and children with SED.

The second part of the Letter announces opportunities for participation in demonstration projects under CMS’s Waiver authority.  The Letter cites to a payment exclusion for services provided to a majority of Medicaid beneficiaries while residing in institutions for mental diseases (IMDs) as a barrier to ensuring adequate access to acute care for beneficiaries with SMI or SED.  As part of the demonstration opportunity, CMS is planning to make available federal financial participation amounts for services provided to beneficiaries who are “short-term residents in IMDs primarily to receive mental health treatments.”  This may allow states to receive federal matching funds for Medicaid-coverable services provided to such individuals in IMDs.  States that are interested in participating in the demonstration project should follow CMS’s Waiver process for submitting proposals, as outlined in the regulations at 42 C.F.R. § 431.412 and 42 C.F.R. § 431.408.

Reporter, Matthew W. Horton, Washington, D.C., +1 202 626 9256,

OIG Advisory Opinion Rejects Pharma Company’s Proposed Free-Products-to-Hospitals Arrangement – On November 13, 2018, the Department of Health and Human Services Office of Inspector General (OIG) issued Advisory Opinion No. 18-14 advising a drug company that its proposal to provide a drug to inpatients without charge could implicate the Anti-Kickback Statute and was not eligible for a favorable advisory opinion. The drug company proposed stocking its high-cost epilepsy drug at hospitals on a consignment basis to make the drug more accessible to providers and patients while offering the drug for free if payers refused to cover the cost. OIG concluded that the proposed arrangement lacked some of the safeguards against fraud and abuse of previously-approved arrangements under which manufacturers provided free drugs to patients.

Click here to read the full advisory opinion.

The drug company’s proposal concerns a drug that has long been indicated for a form of epilepsy that may occur through the end of the second year of life and is often diagnosed in an inpatient setting (Syndrome). The drug is one of only two FDA-approved treatments for the Syndrome, and it is not separately reimbursable by Medicaid in the inpatient setting. The drug often requires up to a five-day hospital stay, which can be longer because hospitals frequently do not stock the drug on-site. Once administered, the drug must be used for two weeks, with a required tapering-off period over the subsequent two weeks, whether the patient remains in the inpatient or outpatient setting. Terminating the drug treatment prematurely can lead to serious complications. The Syndrome population is small and stable, with only about 2,000-2,500 new cases diagnosed in the United States each year.

Hospitals are reluctant to stock the drug for many reasons, but particularly because the drug is very expensive and, during inpatient stays, private and public payers do not sufficiently reimburse hospitals for stays that include treatment with the drug.

Before submitting its proposal, the drug company considered significantly reducing the price of the drug for hospitals to incentivize its use, but the company chose not to do so because it would have a “devastating impact on Best Price” for the treatment under the Medicaid Drug Rebate Program. Instead, the drug company proposed to OIG to provide the drug for free to hospitals for inpatient use for one particular indication to treat the Syndrome. The drug would be stocked on a consignment basis so that it is readily accessible for providers to prescribe. The drug treatment would remain free for the patient unless and until insurance coverage is obtained (the drug is FDA-approved for 18 other indications).

The drug company requested an advisory opinion analysis of its proposed arrangement under the Anti-Kickback Statute. The drug company certified to OIG that its proposed arrangement would not be contingent on any future obligation to purchase the drug or other products from the company. Among other things, relevant parties would have to agree that the company’s free drug may not be resold, billed to a third-party payer, or submitted to Medicaid.

OIG examined the information submitted by the requestor as well as extensive publicly available information to provide context to its review of the proposed arrangement. OIG noted the following in particular:

  • Although the drug is not new, the drug company has dramatically increased the price of the drug over the past 15 years;
  • Although the market for the Syndrome is relatively small and stable, the market for the drug’s other indications has expanded in the past decade;
  • The drug company entered a $100 million settlement with the Federal Trade Commission for acquiring a competitor and “preserv[ing] its monopoly” to “maintain extremely high prices” for the drug; and
  • The drug is available at a “fraction” of the drug company’s price outside of the United States.

Giving weight to this “illuminat[ing]” public information, OIG concluded that the free drug may serve as remuneration to hospitals, which could serve as direct or indirect referral sources for the drug. OIG acknowledged that it previously had approved arrangements to give free outpatient drugs directly to patients based on certain safeguards and benefits to patients and federal healthcare programs. However, OIG concluded that the proposed arrangement presented more than a minimal risk of fraud and abuse, for the following reasons (among others):

  • The proposed arrangement presented “steering” and unfair competition issues because the hospital’s employed physicians may be more likely to prescribe the drug if it is in stock, and the hospital may be more likely to place the drug on its formulary – adding to the likelihood the hospital would either arrange for or recommend purchases of the drug.
  • The proposed arrangement could function as an improper “seeding” arrangement. With the drug stocked on consignment, the hospital could more easily arrange for the provider to prescribe the free drug to inpatients. Once discharged, if insurance covers the drug treatment, then insurers would be charged for it. This situation is exacerbated by the drug’s required tapering-off period:  patients would begin receiving a free drug treatment at the hospital, but would then be required to pay for the drug treatment for several days or weeks after discharge to avoid serious complications. The advisory opinion notes that the arrangement would essentially lock in patients’ use of the drug for weeks, causing the drug company’s claims that free drugs are “not contingent on future purchases” to “ring[] hollow.”
  • The proposed arrangement would do little to create savings that could be passed on to federal healthcare programs. Indeed, providing the drug treatment for free at hospitals under this arrangement for a particular epilepsy patient – rather than simply lowering the cost of the drug overall – would only facilitate the company’s high price for the drug’s other indications in the market. Because the drug would only be free when there was no insurance coverage, the proposed arrangement would not benefit federal healthcare programs.

Based on all of the foregoing, the OIG declined to issue a favorable advisory opinion.

Reporter, Lee Nutini, Atlanta, +1 404 572 3533,

OIG Publishes Top Twelve Management and Performance Challenges Facing HHS – The Office of Inspector General (OIG) for the U.S. Department of Health & Human Services (HHS) recently released its annual publication identifying the top management and performance challenges facing HHS.  In the 2018 edition, OIG’s top challenges include ensuring program integrity and effective administration of Medicare and Medicaid.  Per OIG, the top twelve management and performance challenges facing HHS are:

  1. Preventing and treating opioid abuse;
  2. Ensuring program integrity in Medicare Fee-for-Service and effective administration of Medicare;
  3. Ensuring program integrity and effective administration of Medicaid;
  4. Ensuring value and integrity in managed care and other innovative healthcare payment and service delivery models;
  5. Protecting the health and safety of vulnerable populations;
  6. Improving financial and administrative management and reducing improper payments;
  7. Protecting the integrity of HHS grants;
  8. Ensuring the safety of food, drugs, and medical devices;
  9. Ensuring quality and integrity in programs serving American Indian/Alaska Native populations;
  10. Protecting HHS data, systems, and beneficiaries from cybersecurity threats;
  11. Ensuring that HHS prescription drug programs work as intended; and
  12. Ensuring effective preparation and response to public health emergencies.

Regarding the challenges HHS faces relating to Medicare program integrity, OIG noted that the key components of the challenge are:  (1) reducing improper payments to providers; (2) combating fraud; (3) fostering prudent payment policies; and (4) maximizing the promise of health information technology.  With respect to reducing improper payments, OIG noted that it has identified especially high rates of improper payments for home healthcare, hospice care, durable medical equipment, chiropractic services, care in skilled nursing facilities, and certain hospital services.  OIG recommends that CMS strengthen oversight for billing in these areas.  With respect to combating fraud, OIG stated that CMS should fully employ program integrity tools to prevent payment to fraudulent providers and improve its use of the performance results within the Fraud Prevention System, which runs predictive algorithms and other analytics to identify potentially fraudulent claims. 

OIG also identified Medicaid program integrity as a top management and performance challenge.  The key components of this challenge, according to OIG, are:  (1) improving the reliability of national Medicaid data; (2) reducing improper payments; (3) combating fraud; and (4) ensuring appropriate Medicaid eligibility determinations.  With respect to national Medicaid data, OIG noted the numerous issues with the incompleteness and lack of reliability of Medicaid data, which, according to OIG, hampers the ability to identify potential fraud, waste, or quality concerns.   OIG noted that CMS should make timely data management and uniform reporting a priority.  With respect to reducing improper payments, OIG recommends that CMS continue to engage with state Medicaid agencies to develop corrective action plans and address state-specific reasons for improper payments.  Regarding the challenges facing HHS relating to combating potential fraud and ensuring appropriate Medicaid eligibility determinations, the overall theme from OIG is that CMS should work directly with the states to implement state-specific tools to address these challenges.

OIG’s summary of the components of each of these twelve challenges, HHS’s progress in addressing each challenge, and recommended next steps for each challenge are set forth in detail in the 2018 Top Management and Performance Challenges publication, available here

Reporter, Jennifer S. Lewin, Atlanta, +1 404 572 3569,

Also in the News

OIG Updates its Work Plan to Include Inpatient Hospital Billing Reviews - Beginning in 2017, the Office of Inspector General (OIG) for the U.S. Department of Health & Human Services began updating its Work Plan on a monthly basis.  Last week, OIG issued its monthly Work Plan update.  The updated Work Plan now includes a review of inpatient hospital billing and coding.  Specifically, OIG will conduct a two-part study that is designed to assess inpatient hospital billing.  First, OIG will perform Medicare claims data analysis to assess how hospital billing has changed over time and will use this data analysis to identify audit targets, as well as particular codes to review.  Second, OIG will conduct medical record reviews of certain hospitals to determine which hospitals may have billed incorrectly.  The OIG Work Plan is available here.

FTC Broadens HSR Reporting Requirements for Non-Profit Hospital Combinations - The Premerger Notification Office (PNO) of the Federal Trade Commission recently announced changes to how it and the Department of Justice evaluate transactions that involve the combination of one or more not-for-profit entities, including non-profit hospitals.  Previously, parties’ obligation to file under the Hart-Scott-Rodino (HSR) Act turned on whether the combination would result in a change of control of the board of directors of either party. However, hospital affiliations are often structured to form a new corporate parent for both hospitals, meaning that board control might not change at either entity.  As such, antitrust practitioners have previously assumed that hospital affiliations of this type did not involve a change of beneficial ownership and, consequently, no HSR filing was required.  Recognizing that potentially reportable combinations may occur, even where there is no change of control of the board of directors, the PNO announced that, beginning October 26, 2018, it will analyze nonprofit combinations by focusing on whether one party has gained beneficial ownership over the assets of another party.  A King & Spalding Client Alert with additional analysis on PNO’s announcement can be found here.

The Ohio State University Wexner Medical Center and Mercy Health Launch Healthy State Alliance - On November 14, 2018, The Ohio State University Wexner Medical Center (Wexner), a top academic medical center, and Mercy Health, a Catholic health ministry serving Ohio and Kentucky as part of Bon Secours Mercy Health (Mercy), announced that they have formed an alliance called the “Healthy State Alliance” (Alliance) to tackle Ohio’s most critical health needs.  Wexner and Mercy created the Alliance to “leverage their respective strengths, significantly expand access to life-changing care and improve the health of all of those they serve.” The Alliance has ten stated objectives, though it is focusing initially three objectives in Ohio:  addressing the opioid epidemic and increasing access to cancer care and transplant care.  These objectives were selected because Ohio is “among the top five worst states in the nation with the highest rate of opioid-related deaths,” cancer is the “second leading cause of death in Ohio” and “one Ohioan dies every other day waiting for a life-saving transplant.”  The Alliance is unique in its scope – it will provide “increased access to more than 50,000 team members and more than 600 points of care throughout the state.”  King & Spalding represented both Wexner and Mercy in its creation of the Alliance.  The press release is available here.

Washington Insight: What Will Election 2018 Mean for Healthcare, Medical Device and Pharma Companies - On November 6, 2018, Americans turned out in the largest numbers in our nation’s history for a nonpresidential election.  Control of the House of Representatives flipped to the Democrats, while the Republicans widened their margin slightly in the Senate.  Join us as we discuss the impact of the elections on the healthcare service, medical device and pharmaceutical industries, including:

  • How will the priorities of the next Congress impact the health industry?
  • Will healthcare and the ACA be on the agenda?
  • What are the prospects for regulatory simplification? 
  • How should the health industry prepare for the next two years?
  • How will congressional oversight and investigations impact the healthcare industry?
  • Finally, what will the results of the 2018 midterm elections mean for the 2020 presidential election?

Please join the Washington, D.C.-based Government Affairs and Public Policy practice of King & Spalding LLP on Wednesday, November 28, 2018, for a webinar at 1:00 p.m. ET as we dissect the Election Day results and provide insight on what’s to come for the health industry in the lame-duck session, in 2019, and as America gears up for Election 2020.  To register, click here.