News & Insights


September 23, 2019

Health Headlines – September 23, 2019

King & Spalding Partners Discuss Healthcare Fraud and Abuse – Healthcare fraud and abuse is a top priority for the Department of Justice. Of the $2.8 billion recovered from FCA cases, $2.5 billion involved companies in the life sciences and healthcare industry. Watch King & Spalding partners Sally Yates and Mike Paulhus discuss DOJ’s enforcement priorities.

Victory for Hospitals as Judge Rules that CMS’s Reduction of Medicare Payments for Outpatient E&M Services Was Ultra ViresOn September 17, 2019, U.S. District Judge Rosemary M. Collyer of the U.S. District Court for the District of Columbia awarded summary judgment in favor a group of more than 40 hospitals on their challenge to CMS’s decision to cut payment rates for evaluation and management (E&M) services at off-campus excepted provider-based departments (PBDs). King & Spalding partners Mark Polston, Chris Kenny, Joel McElvain and Nikesh Jindal represented the plaintiff hospitals in this case. Judge Collyer held that the rule was outside of the scope of CMS’s authority because the agency had tried to circumvent the requirement in the OPPS statute that payment adjustments be conducted in a budget-neutral manner. The hospital plaintiffs had also argued that, because Congress had directly addressed OPPS payments for excepted off-campus PBDs in a recent statute, CMS could not override Congress’s judgment at all, even if it had attempted to follow budget-neutrality procedures. Judge Collyer did not rule on this argument, but some language in the Court’s opinion endorses this additional argument as well. Judge Collyer vacated the portion of the agency’s 2019 OPPS rule that announced the cut in payments to excepted off-campus PBDs for E&M services, and “remand[ed] to the agency for further action consistent with the correct legal standard.”  The Court’s opinion which consolidated the hospitals’ case with another lawsuit by the American Hospital Association, can be found here.

In accordance with the OPPS, CMS reimburses hospital outpatient departments for providing outpatient department (OPD) services to Medicare beneficiaries at pre-determined rates. CMS reviews these rates on an annual basis and can adjust various payment factors as it determines appropriate but with the caveat that “any adjustment to the groups, relative payment weights, or adjustments must be budget neutral, meaning that it cannot cause a change in CMS’ estimated expenditures for OPD services for the year.” Thus, as the Court explained, “decreases or increases in spending caused by one adjustment must be offset with increases or decreases in spending by another.” Congress also included the following two provisions as part of the statutory provisions governing OPPS:

  • Under paragraph (t)(2)(F), “the Secretary shall develop a method for controlling unnecessary increases in the volume of covered OPD services.” 42 U.S.C. § 1395l(t)(2)(F).
  • Further, under paragraph (t)(9)(C), “[i]f the Secretary determines under methodologies described in paragraph (2)(F) that the volume of services paid for under this subsection increased beyond amounts established through those methodologies, the Secretary may appropriately adjust the update to the conversion factor otherwise applicable in a subsequent year.” Id. § 1395l(t)(9)(C).

In 2018, CMS promulgated a proposed rule, which became a Final Rule on November 21, 2018 and effective January 1, 2019, in which CMS determined it would pay excepted off-campus PBDs the same rate as physician’s offices for E&M services. Prior to this time, off-campus PBDs that had been in operation 2015 had been paid higher rates than physician offices for E&M services due to higher PBD operating costs. The Final Rule, with a two-year phase-in period, was projected to reduce E&M payments by an estimated $300 million in 2019 and increased to $600 million by 2020.

CMS described this payment cut as a “method” under paragraph (t)(2)(F), rather than an adjustment, and thereby reasoned that it need not follow budget-neutrality rules in imposing the payment cut.  The plaintiff hospitals argued that a simple payment cut for one particular service was not a “method” within the meaning of the statute, and further, that Congress had already decided as a matter of policy that excepted off-campus provider-based departments should be paid at higherrate than physician offices for similar services. On the other hand, CMS argued that the Court lacked “jurisdiction to review the Final Rule under the APA because Congress has precluded judicial review of the development of the Outpatient Prospective Payment System” and because Plaintiffs failed to exhaust their administrative remedies under the Medicare statute.

The Court dismissed CMS’s jurisdictional challenges by concluding that CMS’s actions did “not constitute a ‘method’ within the meaning of [42 U.S.C. § 1395l(t)(2)(F)]” and therefore were not shielded from judicial review. Upon review of the statutory scheme, the Court concluded that the “context does not make clear what a ‘method’ is, but it does make clear what a ‘method’ is not: it is not a price-setting tool, and the government’s effort to wield it in such a manner is manifestly inconsistent with the statutory scheme.” Likewise, “CMS cannot shoehorn a ‘method’ into the multi-faceted congressional payment scheme when Congress’s clear directions lack any such reference.” Quite simply, “nothing in the payment scheme permits service-specific, non-budget-neutral cuts.”

In addressing whether paragraphs (t)(2)(F) and (t)(9)(C) of the statute provide CMS the authority to make these types of payment adjustments, the Court explained that “Congress … does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions—it does not, one might say, hide elephants in mouseholes.” Rather,

the structure of the Outpatient Prospective Payment System makes clear that Congress intended to preserve “the clinical integrity of the groups and weights.” 42 U.S.C. § 1395l(t)(9)(A). There is no reason to think that Congress with one hand granted CMS the authority to upend such a “basic principle” of the Outpatient Prospective Payment System while working with the other to preserve it.

Thus, the Court concluded that CMS’s non-budget-neutral decision to cut Medicare spending by reducing payments made to excepted off-campus PBDs for E&M services was outside the scope of CMS’s authority as granted by Congress.

The Court also determined that “requiring Plaintiffs to exhaust their administrative remedies here would be a ‘wholly formalistic’ exercise in futility” because there was no indication that CMS would change its position on the matter or that further review by CMS would have helped develop the record for judicial review. Therefore, the need to exhaust the CMS review process would not preclude judicial review. 

CMS likely will appeal the district court’s decision.  Even so, the decision is an important one, given that the agency has indicated its broader desire to cut hospital payments under OPPS, and the decision establishes a clear limit on the agency’s authority to make OPPS price adjustments going forward. King & Spalding was listed by Law360 on its Legal Lions List for the week for this victory. 

Reporter, Amy L. O’Neill, Sacramento, CA, +1 916 321 4812,

House Drug Pricing Proposal Released; Surprise Billing Legislation Stalls – On September 19, 2019, House Speaker Nancy Pelosi (D-CA) released H.R. 3, the Lower Drug Costs Now Act, to make a series of changes to Medicare to lower the price of prescription drugs.  The bill must move through three committees - Energy and Commerce (jurisdiction over Medicare Part D and Medicaid); Ways and Means (jurisdiction over Medicare Part A and Part C); and Education and Labor (jurisdiction over ERISA/commercial markets) - before proceeding to the floor for a vote. 

The legislation has four components:

  • Direct federal pricing negotiations for a) insulin or b) at least 25 - and up to 250 - of the most expensive Medicare Part B and Part D drugs (which do not have generic competition) per year.  Negotiated prices would be available to all payers, including the commercial market. A drug selected for negotiation would remain subject to annual negotiation until competition enters the market.
  • Inflation caps on all Part B and Part D drug prices.  If a manufacturer has raised the price of a drug in Part B or Part D above the rate of inflation since 2016, the company must either lower the price to or pay the entire price above the inflation in a rebate back to the U.S. Treasury.  
  • Cap Part D out-of-pocket costs for seniors and individuals with disabilities.  The bill would create a $2,000 annual out-of-pocket cap for Medicare beneficiaries, eliminating the “donut hole” entirely. 
  • Reinvestment of savings from the bill into research and development for new treatments and cures, as well as into Medicare benefit expansion (vision, dental, etc.). 

Rep. Kevin Brady (R-TX), the most senior Republican on the Ways and Means Committee, issued a press release stating: “[w]hile I’m confident Congress can work together to lower out-of-pocket drug costs for seniors and modernize the popular Medicare prescription drug program, this so-called government negotiation idea is more accurately a 'dictate or destroy' price control power that will halt valuable research into new life-saving medicines and give foreign countries dangerous influence over America’s health care system."

The Energy and Commerce Health Subcommittee has scheduled a hearing on the bill on September 25.  The Ways and Means and Education and Labor Committees are expected to hold hearings on portions of H.R. 3 under their jurisdiction.  With Congress scheduled to be in recess between September 27 and October 14, full Committee action before the three Committees is expected to occur the third or fourth weeks of October.  H.R. 3 is likely to pass the House, but real legislative discussions will begin once the Senate determines its position on drug pricing.

President Trump’s position will have a substantial impact on outcome of H.R. 3 in the Senate; unless he supports Speaker Pelosi’s approach, there is little chance the bill could get through the Senate.  Senate Republicans are not enthusiastic about the bipartisan legislation approved by the Senate Finance Committee.  Senate Finance Committee Democrats are supporting this bipartisan legislation and have not indicated support for provisions of H.R. 3.  President Trump has tweeted that he liked Senate Finance Committee Chairman Grassley’s (R-IA) bill “very much,” but he also tweeted it was “great to see” the Speaker’s bill, urging a bipartisan approach.

Surprise Billing

As a result of extensive lobbying and advertising stemming from a significant disagreement within the healthcare industry, legislation to address “surprise” medical bills may now have little chance of enactment.  Before the August congressional recess, House and Senate Committees with lead jurisdiction over the issue had each passed bipartisan legislation in response to consumer outcry that consumers have had to pay the balance when they inadvertently received care from an out-of-network provider.  The Senate Health, Education, Labor, and Pensions (HELP) Committee approved S. 1895, the Lower Health Care Costs Act.  Title I of this legislation addresses surprise medical billing and would include benchmark payments provision, under which health insurers would pay providers the median in-network contracted rate in the geographical area where care is provided.  The House Energy and Commerce Committee amended and approved H.R. 3630, the No Surprises Act, which contained a similar benchmarking approach, with a bipartisan compromise “backstop” to allow a physician to appeal to an arbitrator.  When Congress returned from its August recess, the expectation was that the House Education and Labor Committee would hold a hearing on surprise billing provisions under its jurisdiction (ERISA plans), and both chambers were expected to move forward with legislation.  However, that hearing, and further action on surprise billing, has been stalled.

Opposition to setting benchmark rates was strong, and over the August recess, a so-called “dark-money” group called Doctor Patient Unity invested $27.5 million in advertising to counter the benchmark proposal and argue that arbitration was the only fair way to settle these disputes.  In a last-minute lobbying push at the end of August, emergency physicians met with congressional staff, to urge the Senate to add an independent dispute resolution provision to S. 1895.  Emergency physician advocates argued that a rate-setting approach alone would harm physicians’ leverage in price negotiations, drive smaller physician groups out of business, and result in hospital closures.

It was revealed that two physician staffing firms were the major funders of the Doctor Patient Unity group, and on September 16, House Energy and Commerce Chairman Frank Pallone (D-NJ) and ranking member Greg Walden (R-OR) sent letters to private equity firms that own physician staffing companies.

Reporter, Allison Kassir, Washington, D.C., +1 202 626 5600,

False Claims Act Case Based on Stark Law Violations to Continue After the Third Circuit Revives Whistleblowers’ Claims – On September 17, 2019, the U.S. Court of Appeals for the Third Circuit revived three whistleblowers’ claims alleging that the University of Pittsburgh Medical Center (UPMC) and neurosurgeons employed by three subsidiary entities of UPMC violated the False Claims Act by billing Medicare for services referred by the neurosurgeons in violation of the Stark Law.  The United States District Court for the Western District of Pennsylvania had previously concluded that the relators failed to state a plausible claim and dismissed the relators’ suit.  The Third Circuit reversed the District Court’s dismissal and remanded the case for further proceedings.

The appeal to the Third Circuit revolved around two questions: first, whether the relators offered enough facts to plausibly allege that the neurosurgeons’ pay varied with, or took into account, their referrals – part of plaintiff’s prima facie case for establishing a violation of the Stark Law under an indirect compensation arrangement – and second, whether the relators or the defendants had the burden of pleading that no Stark Law exceptions apply when the relators alleged False Claims Act violations based on Stark Law violations.  As to the first question, the Third Circuit concluded that the relators plausibly alleged that the neurosurgeons’ pay varied with their referrals.  As to the second question, the Third Circuit rejected defendants’ argument that to plead a False Claims Act claim based on Stark Law violations, a relator must plead that no Stark Law exception applied and that the defendant knows that none applies.  The court explained that it is the defendants’ burden to plead a Stark Law exception, not the relators’ burden to plead that none exists.

Relevant to the first question, the neurosurgeons’ employment contracts were between the neurosurgeons and UPMC subsidiary entity and provided for each neurosurgeon to receive a base salary based on an annual quota of work relative value units (wRVUs), which “measure the value of a doctor’s personal services.”  “The surgeons were rewarded or punished based on how many [wRVUs] they generated.  If a surgeon failed to meet his yearly quota, his employer could lower his future base salary.  But if he exceeded his quota, he earned a $45 bonus for every extra [wRVU].”

Under this type of compensation structure, the surgeons were incentivized to maximize their wRVUs, and the relators alleged the neurosurgeons engaged in fraudulent billing practices to artificially boost their wRVUs, and thus their compensation.  Relators also alleged that the number of wRVUs billed by the Neurosurgery Department more than doubled between 2006 and 2009, largely because of the alleged fraud. The surgeons allegedly acted as assistants on surgeries when they did not, stated they acted as teaching physicians when they did not, billed for parts of surgeries that never happened, and performed surgeries that were medically unnecessary or needlessly complex.  And per the relator, they did these things, “[w]ith the full knowledge and endorsement of” UPMC.  Relator further alleged that UPMC made money off the neurosurgeons’ work on some of the neurosurgeons’ referrals and by billing for the hospital and ancillary services for neurosurgeries performed at one of the UPMC hospitals. 

Every time the neurosurgeons “performed a surgery or other procedure at the UPMC [h]ospitals, [the neurosurgeons] made a referral for the associated hospital claims, like nursing services or hospital overhead.”  UPMC then billed Medicare for those referred services.  The majority opinion states, “As a result, the surgeons’ salaries rose and fell with their referrals.  The more procedures they did at the hospitals, the more referrals they made, and the more they would earn by maintaining their base salaries and earning higher bonuses.  And just as their salaries flowed, they also ebbed: the fewer procedures they did, the fewer referrals they made, and the less they got paid.”  Thus, as to the first question, the majority opinion concluded that their aggregate compensation varied with their referrals’ volume and value.

The court’s majority opinion also concluded that the relators sufficiently pled causation, even though the court noted that the relators did not need to plead causation to sufficiently plead the second element of an indirect compensation arrangement – that the referring doctor must receive “aggregate compensation . . . that varies with, or takes into account, the volume or value of referrals.”  In reaching this conclusion, the court noted that “[e]xcessive compensation is . . . a sign that a surgeon’s pay in fact takes referrals into account.  So aggregate compensation that exceeds fair market value is smoke.  It suggests that the compensation takes referrals into account.”  The court highlighted five facts pled by the relators that, viewed together by the court, make plausible claims that the surgeons’ pay exceeded their fair market value.  “First, some surgeons’ pay exceeded their collections.  Second, many surgeons’ pay exceeded the 90th percentile of neurosurgeons nationwide.  Third, many generated [wRVUs] far above industry norms.  Fourth, the surgeons’ bonus per [wRVU] exceeded what the defendants collected on most of those [wRVUs].  And finally, the government alleged in its settlement agreement that [UPMC] had fraudulently inflated the surgeons’ [wRVUs].  That much smoke makes fire plausible.”

The relators first filed suit in 2012 and alleged that defendants submitted false claims for the neurosurgeons’ professional services.  The government intervened as to these claims for professional services and settled those claims for approximately $2.5 million, as reported here.  The government did not intervene as to the claims for hospital and ancillary services billed by UPMC, but it allowed the relators to continue to pursue these claims against defendants.

Circuit Judge Thomas L. Ambro concurred with the majority that the case should be revived, but he disagreed with its interpretation of the “varies with, or takes into account” part of the Stark Law that allegedly tied the surgeons’ pay to the amount of referrals they generated.  Judge Ambro wrote that, “[a]lthough I concur with the judgment of the majority that the relators here have done enough to survive a motion to dismiss, I cannot agree that correlation alone is enough to show that compensation ‘varies with, or takes into account, the volume or value of referrals ….Instead I would hold that this language requires some showing of an actual causal relationship to establish an indirect compensation arrangement under the Stark [Law].” 

Judge Ambro expressed concern that the majority’s “decision suggests . . . that any hospital that pays its affiliated physicians according to some metric of the work they personally perform at the hospital falls under suspicion of violating the Stark [Law], and it can only restore its good name by pleading one of the statutory exceptions— presumably at the summary judgment stage at the earliest, i.e., after discovery has already taken place.”  Judge Ambro acknowledged that, “If this is so, I cannot see why most of the top hospitals in the country, many of whom likely employ similar compensation schemes to UPMC’s, would not be vulnerable to a Stark [Law] lawsuit that could survive a motion to dismiss and proceed to discovery.”  “If compensation that merely correlates with referrals, including correlation based solely on a physician’s own work, is enough to place a hospital under suspicion of violating the Stark [Law] then the only way to evade suspicion altogether, short of abandoning the widespread practice of hospitals employing their own doctors (whether directly or, as here, through a subsidiary), would be to pay those doctors a flat annual salary—and a modest one at that.”

Judge Ambro expressed worry that the majority opinion’s reasoning would send “signals to hospitals throughout the Third Circuit, and the nation, that their routine business practices are somehow shady or suspicious and could leave them vulnerable to significant litigation, with all the trouble and expense that brings.”  

The majority described Judge Ambro’s concerns as “overstated,” explaining that the Department of Justice can, as a first line of defense against abusive suits, dismiss qui tam actions over the relator’s objection.  The majority noted that the Department of Justice recently took a more aggressive approach to dismissing qui tam actions by urging its lawyers to consider dismissal every time the government decides not to intervene.  That guidance is set forth in the Michael D. Granston memorandum, summarized here.

The Third Circuit decision is available here.

Reporter, Kristin Roshelli, Houston, +1 713 751 3263,

OIG Releases Report Regarding Reasonable Assumptions in Manufacturer Reporting of Average Manufacturer Prices and Best Prices for Drugs – On September 18, 2019, OIG released a report assessing a sample of drug manufacturers participating in the Medicaid Drug Rebate Program to identify the primary areas in which they make assumptions when calculating average manufacturer princes (AMP) and best prices (BP). Among other recommendations, OIG suggested that CMS issue additional guidance and consider a process to review certain assumptions that affect price calculations.

In the absence of guidance to the contrary, CMS permits drug manufacturers to make “reasonable assumptions” that are consistent with statutes and regulations when they calculate the AMPs and BPs for Medicaid-covered drugs. AMPs and BPs impact the amount of rebates that manufacturers pay to Medicaid, and are also used to establish the prices paid by healthcare organizations in connection with the 340B Drug Discount Program.

The OIG report notes that historically, CMS has provided little formalized oversight of the reasonable assumptions process.  OIG surveyed a sample of drug manufacturers to identify the key areas in which they make assumptions when calculating AMPs and BPs. OIG determined that the majority of manufacturers reported making reasonable assumptions related to bona fide service fees, bundled sales, and stacked price concessions. OIG also asked manufacturers to identify the areas in which they would like greater guidance from CMS.

In the report, OIG issued the following recommendations for CMS:

  • Issue guidance related to specific areas identified in the report including value-based purchasing agreements;
  • Assess the costs and benefits of implementing a targeted process to review certain assumptions; and
  • Implement a system to share responses to manufacturer inquiries for technical assistance.

The OIG report is available here.

Reporter, Lauren Gennett, Atlanta, + 1 404 572 3592,

Also in the News

CMS Issues Request for Applications to Emergency, Triage, and Transport (ET3) Program – On September 16, 2019, CMS issued a request for applications to ET3, a voluntary, five-year payment model that is designed to provide greater flexibility to ambulance care teams and address emergency health care needs of Medicare beneficiaries following a 911 call. Under this payment model, CMS will pay participating ambulance suppliers and providers to (1) transport an individual to a hospital emergency department or other approved destination, (2) transport an individual to an alternative destination (for example, a primary care doctor’s office or urgent care clinic), or (3) provide treatment in place with a qualified health care practitioner, either on the scene or via telehealth communications.

Additional details about ET3 are available here.

Atlanta Life Sciences & Healthcare Group Fall Event – The Atlanta Life Sciences & Healthcare Group is an educational, networking, and social resource for professionals working in or serving the life sciences and healthcare industry.  King & Spalding invites you to attend our fall event, hosted by Houlihan Lokey, to network with others working in this growing area of our economy.  The event will be held on Thursday, October 10, 2019, from 6:00 p.m. to 8:00 p.m. ET. Click here to RSVP. Please contact Lauren Gennett at if you have additional questions.