Final Value-Based Purchasing Rule Released

On April 29, the Department for Health & Human Services (HHS) announced the launch of the Hospital Inpatient Value-Based Purchasing (Hospital VBP) program under the Medicare Inpatient Prospective Payment System (IPPS).  According to HHS, the Hospital HVP program “marks the beginning of an historic change in how Medicare pays health care providers and facilities-for the first time, 3,500 hospitals across the country will be paid for inpatient acute care services based on care quality, not just the quantity of the services they provide.”

As a part of the launch of the Hospital VBP program, authorized under § 3001(a) of the Patient Protection and Accountable Care Act of 2010 (ACA, codified at 42 U.S.C. § 1886(o)), the Centers for Medicare & Medicaid Services published the final rule outlining the measures, performance standards, scoring methodology, and methodology for translating hospitals’ Total Performance Scores into value-based incentive payments.

Why Should I Care?

Value-based purchasing has been called a “fast-approaching, mandatory competition with millions of dollars on the line.”  The program is aimed to fix two previously identified problems: (1) preventable medical errors and (2) resulting health care costs.  According to CMS:

One in seven Medicare patients will experience some “adverse” event such as a preventable illness or injury while in the hospital.  One in three Medicare beneficiaries who leave the hospital today will be back in the hospital within a month.  Every year, as many as 98,000 Americans die from errors in hospital care.

…

In addition to adding to the suffering of patients and their caregivers, these errors lead to significant unnecessary health care spending. Medicare spent an estimated $4.4 billion in 2009 to care for patients who had been harmed in the hospital, and readmissions cost Medicare another $26 billion.

The Hospital VBP program marks a shift in CMS reforms, from “pay-for-reporting” to “pay-for-performance.”  In 2003, the Hospital Inpatient Quality Reporting (IQR) Program introduced the core-measures concept.  Hospitals that did not successfully report data under the IQR program were penalized by a 2.0 percentage point reduction in their applicable percentage increase.   The Hospital VBP program continues using payment incentives and takes the next logical step “in promoting higher quality care for Medicare beneficiaries and transforming Medicare into an active purchaser of quality health care for its beneficiaries.”  The Hospital VBP program now directly ties payment amounts to a hospital’s performance score.  CMS will begin measuring hospital performance for incentive payments this July.

To fund the Hospital VBP incentive program, CMS will reduce the base operating diagnosis-related group (DRG) payment by 1% in FY 2013 and increase withholding by 0.25% each year until it peaks at 2% in FY 2017.  As a result, approximately $850 million will be allocated for the Hospital VBP program in FY 2013.  Since overall Medicare spending for inpatient stays at acute care hospitals will remain constant, the new payment scheme will benefit some hospitals and hurt others.  As the Hospitalist writes, “[i]t’s also a zero-sum game. That means there will be winners and losers, with the entire cost-neutral program funded by extracting money from the worst performers to financially reward the best.”

How It Works

As summarized by our very own Kate Greenwood:

[§ 3001(a)], which applies to patients discharged on or after October 1, 2012, establishes “value-based purchasing,” meaning that the government will make “value-based incentive payments” to hospitals that provide care to Medicare patients that meets or exceeds certain performance standards to be established by the Secretary of Health and Human Services.  Initially the standards must relate to at least the following five conditions: heart attack, heart failure, pneumonia, surgery, and healthcare-associated infections.  Eventually (by fiscal year 2014) the standards are to incorporate “efficiency measures,” that is Medicare spending per beneficiary must be a factor.

Beginning in FY 2013 (October 1, 2012), hospitals will receive incentive payments “based on how well they perform on each measure or how much they improve their performance on each measure compared to their performance on the measure during a baseline performance period.”  The final rule adopts twelve clinical process of care measures and one patient experience measure, the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) survey.  These measures overlap or align with the Hospital Inpatient Quality Reporting (IQR) Program measures.

FY 2013 Objective Measures

Acute Myocardial Infarction
AMI-7a	Fibrinolytic Therapy Received Within 30 Minutes of Hospital Arrival
AMI-8a	Primary PCI Received Within 90 Minutes of Hospital Arrival
Heart Failure
HF-1	Discharge Instructions
Pneumonia
PN-3b	Blood Cultures Performed in the ED Prior to Initial Antibiotic Received in Hospital
PN-6	Initial Antibiotic Selection for CAP in Immunocompetent Patient
Healthcare-associated Infections
SCIP-Inf-1	Prophylactic Antibiotic Received Within One Hour Prior to Surgical Incision
SCIP-Inf-2	Prophylactic Antibiotic Selection for Surgical Patients
SCIP-Inf-3	Prophylactic Antibiotics Discontinued Within 24 Hours After Surgery End Time
SCIP-Inf-4	Cardiac Surgery Patients with Controlled 6AM Postoperative Serum Glucose
Surgical Care Improvement
SCIP-Card-2	Surgery Patients on a Beta Blocker Prior to Arrival That Received a Beta Blocker During the Perioperative Period
SCIP-VTE-1	Surgery Patients with Recommended Venous Thromboembolism Prophylaxis Ordered
SCIP-VTE-2	Surgery Patients Who Received Appropriate Venous Thromboembolism Prophylaxis Within 24 Hours Prior to Surgery to 24 Hours After Surgery

In FY 2014, CMS will add thirteen more measures.

FY 2014 Objective Measures

Acute Myocardial Infarction
Mortality-30-AMI	Acute Myocardial Infarction (AMI) 30-day Mortality Rate
Mortality-30-HF	Heart Failure (HF) 30-day Mortality Rate
Mortality-30-PN	Pneumonia (PN) 30-Day Mortality Rate
Hospital Acquired Condition Measures
	Foreign Object Retained After Surgery
	Air Embolism
	Blood Incompatibility
	Pressure Ulcer Stages III & IV
	Falls and Trauma:  (Includes:  Fracture, Dislocation, Intracranial Injury, Crushing Injury, Burn, Electric Shock)
	Vascular Catheter-Associated Infections
	Catheter-Associated Urinary Tract Infection (UTI)
	Manifestations of Poor Glycemic Control
AHRQ Patient Safety Indicators (PSIs), Inpatient Quality Indicators (IQIs), and Composite Measures
	Complication/patient safety for selected indicators (composite)
	Mortality for selected medical conditions (composite)

Hospitals will be scored according to achievement (compared to all other hospitals) and improvement (over each hospital’s baseline) for each applicable measure.  Achievement points will be awarded if the hospitals performance during the measurement period (quarterly) exceeds the 50^th percentile of hospitals measured during the baseline period (the “threshold”).  Improvement points will be awarded to the extent that a hospital’s current performance exceeds baseline period performance.

Baseline scores for improvement measurement have already been set, during the period from July 1, 2009 to June 30, 2010.  The FY 2013 performance period for clinical process of care measures will be July 1, 2011 through March 31, 2012.  July 1, 2011 will also mark the beginning of a 12-month performance period for the FY 2014 30-day mortality measures.

The Total Performance Score (TPS) is calculated “for each hospital by combining the greater of its achievement or improvement points on each measure to determine a score for each domain, multiplying each domain score by the proposed domain weight and adding the weighted scores together.”  In 2013, clinical measures will account for 70% of a hospital’s performance score and the HCAHPS survey for 30%.  Over time, scoring methodologies will be “weighted more heavily towards outcome, patient experience, and functional status measures.”

Future Changes

Moving forward, CMS will implement other ACA provisions designed to improve care and reduce costs.  For instance, hospitals will begin receiving reduced payments in FY 2015 if they are unable to prevent certain hospital acquired infections or if the hospital fails to “meaningfully use information technology to communicate within the hospital to deliver better, safer, more coordinated care.”  Check prior posts to learn more about HITECH’s “Meaningful Use” Rule.

WWJD? Health Care Reform and Catholic Social Thought

This Easter, I was struck by a thought while preparing for the day’s celebrations.  I was reflecting on the significance of the day and also thinking of a topic for this week’s post when that 1990s phrase came to mind: WWJD (”What would Jesus do?”).  Although it might be biting off a bit too much to speculate as to how Jesus would vote or how God would reform the American health care system, I have settled for the more modest task of applying Catholic social thought to the debates of the day.

Health Care as a Human Right

In 1963, Pope John XXIII stated in Pacem in Terris that man “has the right to bodily integrity and to the means necessary for the proper development of life,” including the right to “medical care” and “to be looked after in the event of ill health.”  This concept is reflected in a February 2009 publication by the U.S. Conference of Catholic Bishops (USCCB):

All people need and should have access to comprehensive, quality health care that they can afford. Access to health care should not depend on a person’s stage of life, where or whether one works, how much one earns, where one lives, or where one was born. Health care is a social good, and accessible and affordable health care for everyone benefits both individuals and society as a whole.

Although the Bishops call for universal access to affordable care, the means to such an end are left to policy-makers.  For instance, this could be obtained by setting price caps, instituting a single-payor system, or requiring every citizen to maintain a minimal amount of insurance.  With regard to the means, the Bishops call for a system that “respect[s] pluralism, offering a variety of options and ensuring respect for the moral and religious convictions of patients and providers.”

Who Should Be Responsible for Providing Health Care?

In Laborem Exercens, Pope John Paul II explains that it is the role of an employer to provide for “[t]he expenses involved in health care… medical assistance should be easily available for workers, and [] as far as possible it should be cheap or even free of charge.”  However, this is not to say that employers should be the sole providers of health insurance or health care.  Such a structure would neglect the dignity of the unemployed and it would render superfluous the many religious orders that provide health care as a part of their mission.  “Health care ministry is one way the Church continues Jesus’ mission of healing and care for the “least of these” (Mt. 25).”  Catholic health care remains the largest non-profit health care system in the nation, providing care to one in six U.S. patients.

The government also has a duty to protect citizens’ rights to “those things that make life human.”  In Pacem in Terris, Pope John XXIII calls on governments to “give considerable care and thought to the question of social as well as economic progress, and to the development of essential services,” including medical care and the provision of insurance facilities.  Even imprisoned criminals are entitled to receive “timely medical care.”  Furthermore, the U.S. Conference of Catholic Bishops has called on all Catholics “to ensure that everyone has access to those things that enhance life and dignity: decent housing, a job with a living wage, and health care.”

All stakeholders should be financially responsible for universal healthcare, according to ability to pay.  “A fair health care system assures society’s obligation to finance universal access to comprehensive health care in an equitable fashion, based on ability to pay.”  At a bare minimum, the legislatively structured system should reallocate wealth to the extent that all pay their fair share.

The Individual Mandate

The individual mandate, section 1501 of the Affordable Care Act, has been the most contentious (or at least most litigious) aspect of the Affordable Care Act.  As such, it raises the question: WWJD?  At the very least, the USCCB would design the system to create:

1)      effective measures to reduce waste, inefficiency, and unnecessary care;

2)      measures that control rising costs; and

3)      incentives to individuals and providers for effective and economical use of resources.

According to the District Court of the Northern District of Florida, the argument for the individual mandate is that “[w]ithout the individual mandate and penalty in place… people would simply ‘game the system’ by waiting until they get sick or injured and only then purchase health insurance (that insurers must by law now provide), which would result in increased costs for the insurance companies.”  Essentially, the individual mandate forces all individuals to pay their fair share into the insurance pool.  As a result, health insurance costs will decrease.

Although the individual mandate would spread responsibility for universal access to affordable health care, it does not address the three USCCB principles for socially beneficial health reform.  First, it fails to address inefficiency or create incentives for the economical use of resources (except that some may spend less on luxury items or vices to pay their insurance premiums).  Second, although it would reduce premiums, it fails to reduce costs.  Universal insurance coverage does not address the problem of moral hazard.

What the individual mandate does do, is redistribute wealth to the extent needed to cover all individuals and make health care more accessible to all regardless of ability to pay.  Although the individual mandate achieves one Catholic objective (universal, affordable access), it fails to truly “fix” the broken health care system.  More is needed to achieve “true reform” in the Catholic sense.

***

The satisfaction of universal needs, including adequate healthcare, is a constant endeavor.  In the words of Pope John XXIII: “What has so far been achieved is insufficient compared with what needs to be done; all men must realize that. Every day provides a more important, a more fitting enterprise to which they must turn their hands–industry, trade unions, professional organizations, insurance, cultural institutions, the law, politics, medical and recreational facilities, and other such activities. The age in which we live needs all these things.”

FDA Recalls and Selective Analysis

Researchers at the National Research Center for Women & Families and the Cleveland Clinic published a controversial report in the Archives of Internal Medicine in February.   The research team, led by Diana Zuckerman, analyzed high-risk medical device recalls from 2005 to 2009.  The report concludes that “reform of the [510(k)] regulatory process is needed to ensure the safety of medical devices.”

510(k) Process: Cause for Concern?

Zuckerman’s team determined that of the 113 recalls from 2005 through 2009, eighty (71%) medical devices — or the vast majority of those recalled — passed through the 510(k) process.  Twenty-one (19%) medical devices had passed through the more rigorous premarket approval process and eight (7%) were exempted from review.

Consumer advocates and the study authors argue that the disproportionate number of medical devices recalled after being reviewed under the 510(k) process demonstrates the need to reform the review process.   But do these statistics demonstrate a flaw in the 510(k) process?

Advanced Medical Technology Association (AdvaMed), an industry lobbying group says no.  It calls the study flawed.  Why?  The vast majority of devices (~90%) are cleared through the 510(k) process.   Therefore, it would be expected that more recalls are for 510(k) cleared devices.  A 2010 AdvaMed report, analyzed the recall rates for the PMA approval and 510(k) clearance processes.  The report demonstrated that the overall recall rate was very low for both — less than 1% and that PMA approved devices were more likely to be recalled.

In fact, during the Zuckerman study period, 19,000 devices were cleared through the 510(k) process, making the overall recall rate for 510(k) cleared devices approximately 0.4%.

When NPR asked Zuckerman to compare her study with the AdvaMed study, she agreed that most devices had not been recalled. “But I’m taking the public health perspective. How many people have been harmed by these products? We know that 112.6 million devices have been recalled in the last five years. That’s a lot of products. We know thousands of people have died. And those are deaths that did not have to happen.”

But what about all the lives saved?  Mark Adelman, MD, of the NYU Langone Medical Center in New York City, counters, “While some lives have been lost by expedited approval, many lives have been saved by getting better devices to market quickly. How many lives have been saved by the 510(k) fast track?”  Public health advocates, like Zuckerman, would offer a more complete analysis if they took account of both the risks and the benefits in their evaluation of the FDA approval processes.

Misclassification and Proper Review Path?

What if the processes are adequate, but some devices get thrown in the wrong review bucket?  Physicians Rita Redberg and Sanket Dhruva of USC San Francisco wrote in the invited commentary that “Zuckerman and colleagues demonstrate the dangers to patient safety posed by these innumerable device misclassifications.”  The Zuckerman report focused on “high-risk” recalls, or “those that could cause serious health problems or death.”

The report states that “[o]f the recalled devices cleared for market through the 510(k) process, 12% were marketed for risky or life sustaining Class III indications, which are required by law to undergo a full PMA regulatory review.”  In an email to MedPage Today, study author Steven Nissen, MD, of the Cleveland Clinic, elaborated:

There should be NO recalls for ’serious injuries or death’ amongst 510(k) approved devices. The FDA is supposed to require a PMA for Class III devices, those used to sustain life or preserve health. If a PMA is required for devices used to support or sustain life, why were so many of the devices recalled for ’serious injury or death’ originally approved using 510(k)?

Unfortunately, Nissen conflates risk of injury with the life-sustaining capacity of the device.  Although the failure of a Class III device will more likely result in serious injury or death, medical devices in all three Classes may cause serious injury or death if improperly designed or manufactured.  But maybe there is something to this.

Strengthening 510(k) process

What about the steps the FDA has already taken to improve the process?  In late 2009, the FDA began a review of its 510(k) process.  Last August, 55 recommendations were issued by two working groups.  In January, the FDA announced the adoption of 25 changes to the 410(k) process to take place this year.

According to Dr. Jerry Avorn, a professor of medicine at Harvard Medical School in Boston, “The current FDA leadership has been trying to improve the carefulness of device review, and that is very good for patients. But those attempts have been met by self-serving complaints from the device industry that better review and surveillance will somehow stifle innovation, which is not the case.”  Avorn suggests that both industry innovation and consumer safety can be achieved.

Meanwhile, the Institute of Medicine is working on a comprehensive report, commissioned by the FDA, on what’s wrong with medical device regulation. That’s due later this year.

Dialysis and the Problem of Unintended Consequences

A recent New York Times article by Gina Kolata highlighted the debate surrounding dialysis as an end-of-life treatment.  In reading the article and surfing the internet for counter-arguments, I found two points of interest.

Background

According to the Medicare ESRD Network Organizations Manual, Section 299I of the Social Security Amendments of 1972, Pub. Law 92-603, which “created the National End Stage Renal Disease (ESRD) Program … [and] extended Medicare coverage to individuals with ESRD who require either dialysis or transplantation to maintain life.”  In addition, depending on your perspective, Sec. 299I requires/limits the entitlements for/to individuals under the age of 65 who have insurance coverage (remember this age and insurance coverage part — it will be important later in the discussion).

By the time the legislation was adopted in 1972, only 10,000 individuals were being dialyzed in the country and only 20,000 to 25,000 were considered candidates for the procedure.  Section 299I was estimated to cost $250 million over the first four years.  Now, according to the N.Y. Times, about 400,000 people will undergo dialysis at an estimated cost of $40 billion to $50 billion in this year alone.

Has the entitlement had the unintended consequence of benefiting those over 65?

Kolata argues that this law was intended “to keep young and middle-aged people alive and productive” and has had the unintended consequence of financing dialysis treatment for (primarily elderly) individuals who are too sick to benefit from the treatment.  She explains:

When Congress established the entitlement to pay for kidney patients in October 1972… [Congress expected] that most of those patients would be healthy — except for their failed kidneys — and under age 54.

Now… More than a third of the patients are 65 or older, and they account for about 42 percent of the costs. People over 75 make up the fastest-growing group of dialysis patients. And most elderly dialysis patients have other serious diseases like diabetes, heart failure, stroke and even advanced dementia. One-third of them have four or more chronic conditions.

Others, however, would argue that Sec. 299I has not benefited the elderly because they were already entitled to Medicare coverage prior to its enactment.  In the “Dialysis from the sharp end of the needle” blog, Bill Peckham writes in response to Kolata’s argument:

No no no. Dialyzors who are “old and have other medical problems” have access to Medicare due to age or disability, “patients who take advantage of the law” are few: only about 25,000 people [out of about 417,000] have access to Medicare as a consequence of Section 299I of the Social Security Amendments of 1972.

Well…  According to Kaiser, the source of Peckham’s figures, only 5.8% of Medicare enrollees with ESRD directly benefit from Section 299I.  But what about indirect benefits? A comprehensive history of Section 299I can be found in Origins of the Medicare Kidney Disease Entitlement: The Social Security Amendments of 1972, a chapter in Biomedical Politics.  Richard A. Rettig writes:

It was presumed that the benefit existed for the elderly, however, because a Medicare benefit could not be established for those under 65 and not be available for the elderly. In fact, very few elderly persons were being dialized at the time and none were receiving transplants.  Although the Bureau of Health Insurance had answered several inquiries in the previous year, the nature and extent of coverage for the elderly had not been clarified.

The entitlement for those under the age of 65 extends from the third month after “a course of renal dialysis is initiated” until a year after the person has a renal transplant or ends the course of dialysis.  This section could have been read to provide an entitlement to dialysis and renal transplant solely to those under the age of 65, or it could be interpreted to create a near universal entitlement to such treatments.

It seems that President Nixon’s administration read Section 299I according the latter interpretation, because in his statement on the Signing of the Social Security Amendment of 1972 Nixon said, “it extends Medicare coverage for kidney transplants and renal dialysis.”

Aggressive Treatment and End of Life Care

“Clearly, when the program was initiated in the 1970s, the hope and expectation was that this program would return otherwise healthy people back into society so they could work and be productive,” said Dr. Manjula Kurella Tamura, a kidney specialist at Stanford. But, she added, “dialysis at the end of life is a different sort of treatment.”

A second important aspect of the article is its focus on end-of-life care.  Even Peckham concedes that, “caring for the elderly is expensive and aggressive treatment may not always be in the interest of the ill. That is a serious discussion our electorate should have but has not been able to have.”

The article highlights new clinical practice guidelines produced by the Renal Physicians Association designed to promote, through shared decision-making and informed consent, “medical management without dialysis.”  Particularly concerning is that the provision of dialysis gives patients false hope of survival.  According to the NY Times:

Recent studies have found that dialysis does not prolong life for many elderly people with other serious chronic illnesses. One study found that the procedure’s main effect is to increase the chances that such patients will die in the hospital rather than at home.

Yet, a 78-year-old woman is quoted as saying, “I go to dialysis because I want to live.  I want dialysis.”  Although he doctors explained that dialysis would not necessarily prolong her life, she chose aggressive treatment because, “Some life is better than no life.”  This anecdotal story raises a HUGE informed consent problem because it appears that the patient may not have understood the risks and benefits of undergoing dialysis.

Key to the decision to forego, commence, or withdraw dialysis is a properly informed consent. The above guidelines state that certain patients, including those age 75 years and older, those with high comorbidity scores, those with marked functional impairment, or those with severe chronic malnutrition, “should be informed that dialysis may not confer a survival advantage or improve functional status over medical management without dialysis and that dialysis entails significant burdens that may detract from their quality of life.”

***

The ESRD program has provided life-saving dialysis to many people.  However, as with many other tests and treatments performed in the last year of life, it is important to ensure that patients (or their legal decision-makers) are properly informed about the risks and benefits of all options, including palliative care, at the end of life.

Lawsuit Against Guidant for Making False Statements (Again)

As we reported a little while back, the Department of Justice obtained what FDA Commissioner Hamburg declared “the largest criminal penalty ever imposed on a device manufacturer for violating the Food, Drug and Cosmetic Act” against Boston Scientific subsidiary, Guidant LLC.

Following this record breaking performance, the Department of Justice filed suit against Guidant LLC on January 27, 2011.  Yes, that is correct — Guidant is once again subject to a federal claim resulting from false statements made regarding three models of its implantable cardioverter defibrillators that were recalled for short-circuiting failures.  This time, however, it is alleged that “Guidant knowingly caused the submission of false or fraudulent claims for implants of faulty… devices to the Medicare program” in violation of the False Claims Act.

John R. Marti, First Assistant U.S. Attorney for the District of Minnesota was quoted in the Department of Justice press release stating:

When companies like Guidant request and receive federal dollars for products they know to be defective, the United States is committed to aggressively seeking the recovery of those payments. That is especially true when the defective products endanger human lives. In today’s environment, it is essential that Medicare and other public health care programs be made whole to ensure their continued vitality for future generations.

Well that makes sense.  But why bring the False Claims Act claim separately from the claims for violations of the Food, Drug and Cosmetic Act (”FDCA”)?  The most obvious reason is as follows: the Department of Justice did not bring the False Claims Act claim against Guidant.  The United States joined a lawsuit filed by qui tam relator James Allen, a patient who allegedly received a defective device.

The complaint alleges that approximately 2,000 false claims were submitted to the Medicare program.  It also includes ten examples of individual false claims ranging from $20,201.14 to $ 46,130.20.  With treble damages and civil penalties of not less than $5,500 and up to $11,000 for each violation, the recovery could range anywhere from $132 million to $298 million.  The record-breaking $296 million in fines and forfeitures for violations of the FDCA standing alone looked formidable; coupled with this latest volley, it is staggering– a potential total minimum of $428 million, maximum  of just shy of $600 million.

According to Fox News, Boston Scientific “is disappointed that the federal government, after reaching a criminal resolution with Guidant LLC, has chosen to seek additional money in a civil lawsuit.  However, the company believes that the ultimate resolution of this matter should not have a significant financial impact.”

Res Ipsa Loquitur

Medicaid Targeted as States Cut Budgets

On January 21, Arizona passed legislation allowing the state to submit a Medicaid-waiver request to cut 280,000 people from the program next year.  When filed, it became the first official request to suspend PPACA’s “maintenance-of-effort” provision.  The mandate requires states to maintain early 2010 Medicaid eligibility levels until the 2014 nationwide expansion of eligibility.  Arizona could lose its entire federal Medicaid contribution, approximately $3 billion, if it fails to meet the maintenance-of-effort provision.

The Associated Press reports that most Arizonans who lose coverage are “non-pregnant, non-disabled, childless adults and also parents with incomes above 50 percent of the federal poverty level.”  According to the Arizona Republic, however:

Though the cuts have been billed as affecting only childless adults, about 30,000 of those who would lose coverage are parents and another 11,000 are children.

Read more

Guidant Defibrillator Enforcement Reaches a Conclusion

On January 12, the U.S. District Court for the District of Minnesota convicted and sentenced Guidant LLC for criminal violations of the Federal Food, Drug, and Cosmetic Act, nearly a year after charges were filed.  The Court ordered Guidant to submit to three years probation, against the recommendation of the prosecution, and to pay more than $296 million in fines and forfeitures included within the plea agreement.

The Charges

On February 25, 2010, the Department of Justice (DOJ) brought charges against the Boston Scientific Corp. subsidiary and medical device manufacturer for “its mishandling of short-circuiting failures of three models of its implantable cardioverter defibrillators” (according to a recent press release).

After a four-year investigation, the DOJ concluded that Guidant became aware of design defects which rendered its products inoperative in 2002 and 2004.  Guidant was charged with “making materially false and misleading statements on report(s) required to be filed” with the Food and Drug Administration (FDA) on Aug. 19, 2003, when it informed the FDA that a design change to correct the flaw did not affect the safety and effectiveness of device.  Guidant was also charged with “failing to promptly notify” the FDA of a device “correction” which was made to “reduce a risk of health posed by the device.”  In 2005, Guidant recalled the ICD devices.

The Court Rejects the Plea Agreement

On March 11, 2010 — within a month of the indictment — Guidant and the Department of Justice submitted a plea agreement in which Guidant agreed to plead guilty to both counts, to pay a criminal fine in the amount of $253,962,251, and to pay a criminal forfeiture of $42,079,576.  On April 5, 2010, Guidant pled guilty and FDA Commissioner Margaret A. Hamburg, M.D. declared that the “entry of a guilty plea by Guidant LLC and the proposed resolution would represent the largest criminal penalty ever imposed on a device manufacturer for violating the Food Drug and Cosmetic Act.”

However, on April 27, 2010, District Judge Donovan W. Frank rejected the plea agreement.  He found that “after careful deliberation,” it was “not in the best interests of justice and [did] not serve the public’s interests.”  In his opinion, Judge Frank cited arguments raised by a class of “consumers of Guidant products at issue” regarding restitution and the absence of a probation provision among the reasons for his delayed decision.  He concluded that restitution was inappropriate because there were “no victims directly and proximately harmed by Guidant’s criminal conduct.”

The absence of a provision requiring probation proved fatal to the agreement.  Specifically, Judge Frank stated that Guidant “could be ordered to perform community service designed to repair the harm caused by its offenses…” or to establish or expand a compliance and ethics program.  Furthermore, the presentence investigation report would enable “the Court to consider the feasibility of any of these suggestions or of additional conditions of probation.”

The Sentencing Hearing

On January 4, 2011, both parties submitted further information in anticipation of the January 12 sentencing hearing.  Guidant provided summary information regarding its continued and expanded compliance activities, including its five-year Corporate Integrity Agreement with HHS-OIG, and its charitable and community service activities.  The government stood by its original plea agreement and did not advocate for probation.

On January 12, the Court signed the plea agreement with modification.  In addition to Guidant’s payment of the fines and forfeitures outlined in the agreement, Guidant will submit to probationary period of three years.  According to the DOJ, “Guidant is required to make quarterly reports to the Probation Office and to submit to regular, unannounced inspections of its records by the Probation Office.   The court also required Guidant to notify its employees and shareholders of its criminal conviction.”

Looking Ahead

Having been hailed the “largest criminal penalty ever imposed on a device manufacturer for violating the Food Drug and Cosmetic Act,” it is noteworthy that the Court did not accept the sentencing recommendations offered in the plea agreement.  Despite evidence of compliance changes and a five-year Corporate Integrity Agreement with the HHS-OIG, the Court felt it necessary to add probation to Guidant’s sentence.

In a time when individuals face exclusions from federal health programs even absent criminal sanctions, health-related corporations should likewise keep an eye on the resolution of future criminal cases.  Is this a single “victory for one federal judge who put his foot down… until he got what he thought was a fair deal,” as Law.com reports, or the start of a trend?

A complete record of the filings can be found here.

Pharma Coupons: Enriching the Drug Companies

A recent New York Times article highlighted an increasing trend in pharmaceutical consumerism.  Many drug companies are providing copayment or coinsurance payment assistance.  These subsidies now exist “for about half of the top 100 brand-name drugs sold in this country,” according to health analyst Richard Evans of Sector & Sovereign Research.  Some patients receive copayment cards or coupons from their physicians while others find them on the internet.

So what’s the big deal?  Insurance companies use cost sharing to encourage patient selection of less-costly therapeutic options.  Pricing differences influence consumer choices; The American Journal of Managed Care reported in 2005 that most studies of cost sharing and prescription purchasing estimate that a 10% increase in price would decrease consumer use by 1-4%.  As NPR reported, “[t]he copay strategy worked so well that in 2003, more than half of all drugs picked up at pharmacies were generics.”

In mid-2006, pharmaceutical companies introduced coupons to reduce beneficiaries’ out-of-pocket costs for expensive drugs.  The “pharmaceutical subsidies” act as a counter-incentive, steering patients toward more expensive drugs–which wind up costing the consumer less– or zero–out-of-pocket.  As a result, the use of pharmaceutical copayment cards or coupons has tripled since their inception.

Financial Assistance or Greedy Marketing?

According to the NY Times, “[d]rug companies say the [copayment assistance] plans help some patients afford medicines that they otherwise could not.”  However, this seemingly altruistic explanation rings–shall we say– like something less than the entire truth.  For starters, these coupons are widely available on the internet and physicians who distribute the cards do not screen patients for financial need.  As the NYTimes reports,

Executives at Medicis, the company that sells Solodyn, have told investors that the co-payment card is used by an “overwhelming majority” of patients, and is largely responsible for doubling use of the drug, to 26,000 prescriptions a week.

That sounds like brilliant marketing, not need-based financial assistance.

Also, when we think of those who are most in need, we often think (rightly or wrongly) of the uninsured, the poor and the elderly — none of whom benefit from the pharmaceutical subsidy!  As the Amgen First Step Program website states, it is “a medical benefit co-pay coupon program to help commercially insured eligible patients with their deductible, co-insurance, and/or co-pay requirements” for listed drugs.  Excluded from the program are the uninsured or those in publicly funded health insurance plans.

It is unsurprising that the uninsured are excluded from participation.  According to Joshua Schimmer, a biotechnology analyst, “it seems the best strategy for a pharmaceutical company is to price their drug as high as they possibly can and offer that co-pay assistance broadly.”  For example, over the past five years, Jazz Pharmaceuticals has quadrupled the price of its narcolepsy drug Xyrem, while increasing copayment assistance to a maximum $1,200 a month.  In order for the pricing system to work, pharmaceutical companies rely on consumers to choose the subsidized drug and insurers to foot the increased bill.

It is likewise unsurprising that the publicly insured are excluded, but for a very different reason; to offer subsidies to Medicare or Medicaid patients would be illegal.  Under 42 U.S.C. § 1320a-7b (1),(2), the knowing and willful offer, payment, or receipt of any remuneration in return for the purchase of any good “for which payment may be made in whole or in part under a Federal health care program” is a felony punishable by up to $25,000 or five years imprisonment.  Illegal remuneration includes “waiver of coinsurance and deductible amounts (or any part thereof)…”  (§ 1320a-7a (i)(6)).

So What’s the Big Deal?

The pharmaceutical copay cards and coupons are a big problem.  First, they circumvent the cost sharing structures established by health insurance plans, raising systemic health costs.  As the NYTimes reported:

“The member is somewhat insulated from the cost of the prescription,” said Kevin Slavik, senior director of pharmacy at the Health Care Service Corporation, which runs Blue Cross and Blue Shield plans in Illinois and three other states. “In essence, it drives up the total cost of providing the prescription benefit.”

That increased cost is passed on to the privately insured in the form of increased premiums and to the public through increased taxes.  As Eileen Wood, vice president of the Capital District Physicians’ Health Plan, told NPR in 2009:

those coupons come with a consequence. If everyone started using coupons to get the more expensive drugs, “we’d have to raise premiums,” she says. “There’s no question about that.”

Furthermore, publicly funded plans must also pay the increased price of prescription drug benefit, which is passed on to taxpayers.  Any benefit to the coupon user in the form of reduced out-of-pocket expenses is diminished by higher premiums and taxes.  In the final analysis, the only real beneficiaries of these “pharmaceutical subsidies” are the drug companies who offer them.

Moving Forward

This issue is not one that is likely to disappear.  Currently, Massachusetts is the only state that does not allow pharmaceutical coupons; it is possible that other states or the federal government will follow suit.  As for insurers, some may begin requiring patients to try generic drugs first, as Capital District Physicians’ Health Plan has, or simply drop coverage of these drugs altogether.  Either way, drug company coupons will remain a topic to watch in 2011.

Obama Signs Provision Contrary to Fraud Enforcement Trend

On December 15, 2010, President Obama signed the Medicare and Medicaid Extenders Act of 2010 (the Medicare Physician Pay Fix Bill).  In addition to its one-year delay of a 25% cut in Medicare reimbursements to physicians, the act repeals § 6502 of the Patient Protection and Affordable Care Act which would have become effective on January 1, 2011.  This move stands in stark contrast to a recent trend toward increased individual liability, specifically the increased exclusion of individuals from federal healthcare programs for fraud and abuse violations.

Enforcement Trends

The federal government, through the Department of Health & Human Services Office of the Inspector General (OIG), has increased its focus on individuals, with exclusions for fraud and abuse violations.  As previously reported, OIG released an internal advisory document on October 20, 2010, setting out nonbinding factors for permissive exclusions under § 1128(b)(15) of the Social Security Act.  The new Guidance changed the permissive exclusion standard to a quasi-mandatory standard, by creating a presumption in favor of exclusion when an individual exercises ownership, operational or managerial control over a sanctioned entity and there is evidence that such individual knew or should have known of the prohibited conduct.

OIG swiftly acted on the new Guidance by excluding Marc S. Hermelin, Chairman of the board and majority shareholder of K-V Pharmaceutical.  As a result, K-V announced on November 17, 2010 that Hermelin had resigned and agreed to divest himself of all K-V stock.  On December 7, 2010, Gregory E. Demske, Assistant Inspector General, announced that the exclusion of Hermelin was “preview of things to come.”

Further, on November 9, 2010, former GlaxoSmithKline Vice President and Associate General Counsel Lauren Stevens was charged with obstruction of justice and making a false statement in response to a Food and Drug inquiry.  Michael W. Peregrine, with McDermott Will & Emery LLP, told BNA that, “the Stevens prosecution is a piece of a broader puzzle based in part on the responsible corporate officer doctrine and reflects the government’s heightened interest in fostering individual accountability and that is consistent with other recent attempts by prosecutors to target individuals they believe are responsible for corporate misconduct.”

Section 6502

Section 6502, which was repealed on December 15, would have continued the trend toward increased individual liability.  It would have mandated state Medicaid agencies to exclude an individual or entity that “owns, controls, or manages” a Medicaid-participating entity that:

• Has delinquent, unpaid Medicaid overpayments
• Is suspended or excluded from participation in Medicaid, or
• Is affiliated with an individual or entity that has been suspended or excluded from participation in Medicaid

The Medicaid exclusion authority of § 6502 is different than § 1128(b)(15) of the Social Security Act.  Unlike § 1128(b)(15), which provides for permissive exclusion from all federal health care programs,  § 6502 would have provided for mandatory derivative exclusion from Medicaid only.  Laurence Freedman, an attorney with Patton Boggs told BNA that “this mandatory Medicaid exclusion needed to be repealed to avoid a broad, and I believe, unintended impact.  It would have reached former executives or board members of excluded subsidiaries, for example.”

Senate Fails to Repeal Form 1099 Reporting Requirements

On November 30, the Food Safety Modernization Act (Senate Bill 510) passed the Senate with a 73-25 vote.  Despite bipartisan support for the bill, on November 29, the Senate rejected two amendments to repeal Form 1099, a measure which likewise carries bipartisan support.

Form 1099 is an informational return required of any business that pays a vendor or contractor more than $600 in a tax year.  Pursuant to the Patient Protection and Affordable Care Act, all corporations must fill out one Form 1099 for each qualifying payment relationship beginning in 2012.  The tax requirement has been criticized as an onerous and burdensome requirement for small businesses.

Although both proposed amendments would have repealed the new rules, the bipartisan agreement was limited to that single issue.  Democrats and Republicans have not decided how to offset the loss of approximately $20 billion over ten years that will result from repeal of the Form 1099 reporting requirements.  Senate Finance Committee Chairman Max Baucus’s (D-Mont) amendment (S. Admt. 4713) did not include any budgetary offset, an omission which appears to have sunk the amendment.  The Baucus amendment failed in a 44-53 vote.

The competing amendment (S. Admt. 4702) was offered by Senator Mike Johanns (R-Neb) and would likewise repeal the Form 1099 requirements.  In addition, it would have offset the cost of repeal by permanently rescinding $39 billion in discretionary non-defense spending.  The Johanns amendment garnered more support, but ultimately failed in a 61-35 vote (the amendment required 67 votes to pass).

According to BNA, Senators Baucus and Johanns spoke after the vote and have agreed to work together on a bipartisan solution.  Senator Baucus told BNA, “We will probably need to find a revenue bill, but our desire is to get this done. We will do whatever works.”

Senator Chuck Grassley (R-Iowa), also a member of the Senate Finance Committee, stated that negotiations had begun on November 30 to solve the Form 1099 reporting problem.  According to Grassley, the two main issues are (1) how to pay for the repeal and (2) what bill will serve as a legislative vehicle.  “I assume there’s going to be at least one tax bill this year and if there isn’t, there’s something wrong … so some sort of tax bill has to go and you can put it on that.”

Lawmakers still have time to work out these two issues, since the Form 1099 requirements do not go into effect until 2012.

OIG Excludes K-V Chairman Pursuant to New Guidance

As previously reported, the Department of Health and Human Services Office of Inspector General (OIG) recently issued new Guidance on permissive exclusion of individuals, including owners, officers, and managing employees.  Accordingly, “if the evidence supports a finding that an owner knew or should have known of the conduct, OIG will operate with a presumption in favor of exclusion.”

On November 17, K-V Pharmaceutical (K-V) announced that Marc S. Hermelin, a member of its board of directors and son of K-V founder Victor Hermelin, had resigned and was being excluded from participation in federal health care programs.  He is the first pharmaceutical company official to be excluded who was not also convicted of a crime.

The exclusion by OIG took place within a month of the new Guidance, but follows almost two-years of compliance problems for K-V with the Food & Drug Administration (FDA).  As Larri A. Short of Arent Fox LLP told BNA:

This is an important development since it represents the OIG’s first use of its permissive exclusion authority under 42 U.S.C. 1128(b)(15)(A)(ii) and comes within a very short time after the OIG publicly announced its intention to begin using its discretion to exercise this authority after a company has been sanctioned. … The excluded individual is not just a board member, he was the Chairman of the Board and the majority stockholder with about 48 [percent] of the company’s stock. If he were not selling his stock and resigning, it appears that the OIG was also prepared to exercise its discretion to permissively exclude K-V itself under its authority at 42 USC 1128(b)(8)(A) and (B).

The history of K-V pharmaceuticals indicates under what circumstances OIG may pursue a permissive exclusion.  Also, the actions taken by Mr. Hermelin and K-V Pharmaceutical upon learning of his impending exclusion may be of some value to other organizations and individuals who may find themselves in a similar position.

K-V Pharmaceutical’s History with HHS

A 2008 FDA inspection determined that K-V was (1) not complying with a 2007 FDA enforcement notice requiring pre-market approval for a time-release drugs containing guaifenesin, and (2) manufacturing and distributing unapproved new drugs.  As a result, the FDA filed a civil forfeiture action in the Eastern District of Missouri in July of that year and seized $24.2 million in unapproved new drugs.

In December 2008, Mr. Hermelin left K-V after 35 years with the company.  K-V announced that Mr. Hermelin was being investigated for mismanagement and had been fired for cause.  Mr. Hermelin announced that he had chosen to retire.

In January 2009, K-V voluntarily suspended manufacture and distribution of all products and voluntarily recalled most of its products.  Under a consent decree announced in March 2009, K-V was barred from resuming manufacture and distribution until FDA officials and an independent expert inspected and certified that K-V facilities were in compliance.

In February 2010, Ethex Corp., a wholly-owned subsidiary of K-V, pled guilty to two felony counts for allegedly misbranding and adulterating drugs and not disclosing to the FDA that it had been producing oversized painkiller tablets.  K-V agreed to pay an administrative forfeiture and restitution in the amount of $27.6 million.  K-V received FDA approval to introduce its first drug to market this past September.

K-V Pharmaceutical’s Reaction to Mr. Hermelin’s Exclusion

When the owner of a company participating in federal health care programs is excluded by OIG, it places the entity in a precarious position.  Mr. Hermelin and K-V Pharmaceutical took immediate steps to avoid any adverse impact on the company.

K-V confirmed through counsel that OIG had notified Mr. Hermelin of his impending exclusion.  According to the company’s SEC filings:

If a director of our Company, or a shareholder with an ownership interest of five percent or more, is excluded from participation in federal or state health care programs, then the Department of Health and Human Services, Office of Inspector General (”HHS OIG”) has discretionary authority also to exclude the Company from such participation.

According to a K-V Press Release, in order to prevent the discretionary exclusion of K-V, Mr. Hermelin:

• resigned his position on the board of directors on November 10;
• resigned his position as trustee on all family trusts holding K-V stock; and
• agreed to divest his personal ownership of Class A Common and Class B Common stock pursuant to a divestiture plan and schedule approved by OIG.

Notice of Mr. Hermelin’s exclusion was posted on the OIG website.

Two Proposals to Reduce Health Care Spending

In the past few weeks, two bipartisan groups have made deficit reduction proposals that address national health care spending.  The nation faces a trillion dollar-plus budget deficit, and health care spending is a large proportion of ongoing spending.

National Commission on Fiscal Responsibility and Reform

On November 10, the chairmen of the bipartisan National Commission on Fiscal Responsibility and Reform released an initial draft proposal to reduce the deficit.  The panel consists of ten Democrats and eight Republicans, “charged with identifying policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run.”

Several commission members have praised the proposal, but will seek changes before endorsing a final version.  The chairmen, Erskine Bowles, former chief-of-staff to then President Clinton, and Alan Simpson, a former GOP senator held a closed-door meeting this past week to discuss modifications before the panel presents its final recommendations on December 1.

Although the drafted proposal addresses a broad array of fiscal problems and objectives, it makes dramatic changes to health care spending.  In the medium term, the chairmen propose the following:

• Pay doctors and other providers less, improve efficiency, and reward quality by speeding up payment reforms and increasing drug rebates. Specifically:
  • Replace cuts required by the Medicare Sustainable Growth Rate (SGR) through 2015 with modest reductions while directing CMS to establish a new payment system, beginning in 2015, to reduce costs and improve quality.
  • Require rebates for brand-name drugs as a condition of participating in Medicare Part D.
• Pay lawyers less and reduce the cost of defensive medicine by adopting comprehensive tort reform.
• Expand cost-sharing in Medicare to promote informed consumer health choices and spending. Specifically:
  • Eliminate first-dollar coverage in Medigap plans.
  • Replace existing cost-sharing rules with universal deductible, single coinsurance rate, and catastrophic cap for Medicare Part A and Part B.
• Expand successful cost containment demonstration.
• Strengthen the Independent Payment Advisory Board (IPAB).
• Identify an additional $200 billion savings in federal health spending, for instance:
  • Expand ACOs, Payment Bundling, and Other Payment Reform
  • Cut Federal Spending on Graduate and Indirect Medical Education
  • Convert The Federal Share Of Medicaid Payments For Long-Term Care Into a Capped Allotment

In the long term, the chairmen propose to set a global target federal health spending after 2020 and limit growth to the gross domestic product (GDP) plus one-percent.

CRS Issues Medicare Reform Summary and Timeline

The Congressional Research Service (”CRS”) released a November 3, 2010 report entitled Medicare Provisions in the Patient Protection and Affordable Care Act (PPACA): Summary and Timeline.  It outlines and summarizes the significant changes made to the Medicare program by the Patient Protection and Affordable Care Act (”PPACA”; P.L. 111-148), as amended by the Health Care and Education Affordability Reconciliation Act of 2010 (”the Reconciliation Act”; P.L. 111-152).

Prior to the enactment of PPACA and the Reconciliation Act (”the Reform Acts”), the Congressional Budget Office predicted that total mandatory annual expenditures would increase “from $501 billion in 2009 to $943 billion in 2019.”  Under these health reform measures, the average annual rate of spending growth will reduce from 8 - 6%, resulting in approximately $390 billion in savings over the next ten years.

Medicare Changes by Provider Type and Program

The Reform Acts will have three primary affects on Medicare Part A coverage.  It will: 1) constrain payment increases, 2) restructure payments, and 3) reduce payments to disproportionate share hospitals by $22.1 billion from FY2015 to FY2019.

The Reform Acts are expected to directly and indirectly change the way Part B Providers organize, practice, and deliver care.  Medicare Physician Quality and Reporting Initiative (PQRI) incentive payments will be extended through 2014 and “an incentive (penalty) for providers who do not report quality measures” will be implemented in 2015.  The Reform Acts create other programs, including the National Pilot Program on Payment Bundling, the shared savings program (including the accountable care organization, or ACO, model), or the value-based payment modifier under the physician fee schedule.  Additionally, the Reform Acts will save approximately $196.3 billion over 10 years by constraining annual payment increases for certain non-physician providers.

The Reform acts will save $135.6 billion over 10 years by changing Medicare Advantage (Medicare Part C) plan payments.  PPACA will decrease many benchmark amounts by tying them to the per capita fee-for-service Medicare spending amounts.  At the same time, PPACA will increase benchmarks for certain high quality plans.  By 2011, coding intensity adjustments will be applied to plan payments.

PPACA will improve coverage under the Medicare prescription drug program (Medicare Part D) by closing the coverage gap between $2,830 in total covered drug spending and the catastrophic threshold of $6,440 (the “doughnut hole”).  “Enrollees will receive a 50% discount off the price of brand-name drugs during the coverage gap starting in 2011, and the coverage gap will be phased out by 2020.”  Access to and availability of low-income subsidies will be improved through increased funding.

Efficiency and Quality of Health Care Services

To increase the efficiency and quality of Medicare services PPACA requires “the establishment of a national, voluntary pilot program that will bundle payments for physician, hospital, and post-acute care services with the goal of improving patient care and reducing spending.”  This shared savings program is expected to save $4.9 billion over ten years.  Another provision establishing payment adjustment to hospitals for “readmissions related to certain potentially preventable conditions,” will likely save $7.1 billion over the next ten years.  Approximately $1.4 billion should also be saved through the institution of a payment penalty for certain common, high-cost hospital-acquired health conditions.

Finally, the creation of a Center for Medicare and Medicaid Innovation within CMS is expected to save $1.3 billion over the next 10 years.  Its purpose will be “to research, develop, test, and expand innovative payment and delivery arrangements to improve the quality and reduce the cost of care provided to patients.”

Medicare Sustainability

To address financing challenges, the Reform Acts have established several revenue producing mechanisms.  First, a new Hospital Insurance tax of 0.9% on high-wage earners (”over $200,000 for single filers and $250,000 for joint filers effective for taxable years after December 31, 2012″) and a new Medicare tax on net investment income will together raise $210 billion between 2013 and 2019.

Second, Part B and Part D beneficiaries will face increased premiums.  Part D premium increases will save approximately $11 billion over 10 years and adjustments to the high-income threshold for Part B premiums will save $25 billion over 10 years.

Finally, to reduce spending growth, PPACA establishes an Independent Payment Advisory Board empowered to adjust payment rates.  This Board is expected to save $15.5 billion between 2015 and 2019.

Fraud, Waste and Abuse

The amount of money lost to fraud is estimated to be between 3-10% of all health care expenditures.  To combat this problem, the Reform Acts allocate $260 million in increased funding for anti-fraud activities over the next ten years.

In Conclusion

Despite the projected savings resulting from PPACA and the Reconciliation Act, “the rising cost of health care, the impact of the aging baby boomer generation, and declining revenues in a weakened economy” will continue to challenge the quality and sustainability of the Medicare Program.  The report cautions that savings estimates are based on questionable assumptions.  Furthermore, such savings can either be used to defer solvency issues or expand health insurance coverage, not both.  Meanwhile, the practice of medicine is expected to undergo significant changes.

Despite the uncertainty in coming years, the CRS report will serve as a helpful guide and benchmark.  The appendices provide detailed tables of spending adjustments by provider and by year, against which continuing surveillance of spending growth can be monitored.

Two Courts Interpret Regulations to Expand Medicare Coverage

As first reported by the New York Times, two Federal District Courts have rendered decisions within the past six weeks that expand Medicare coverage for skilled nursing care (”SNC”).  According to the rulings, Medicare beneficiaries are entitled to such coverage without, as the government contends, proof that their condition will improve as a result of treatment.

In both cases, Medicare beneficiaries appealed final decisions of the Secretary of the Department of Health and Human Services (”Secretary”) denying Medicare coverage under, individually, Part A and Part C (a Medicare Advantage plan) of the Medicare Program.  Since Medicare Part A and Medicare Advantage plans are required to cover the same medical services under 42 C.F.R. § 422.101, the courts’ frameworks of analysis should be the same.  However, each court relied on various administrative provisions to support of the principle that Medicare beneficiaries are entitled to SNC to maintain stable health and prevent deterioration of capabilities.

Papciak v. Sebelius, 2010 U.S. Dist. LEXIS 102801

In Papciak, the eighty-one-year-old Plaintiff received seventeen days of inpatient SNC shortly after hip replacement surgery.  Medicare denied coverage for the last ten days of care, on the ground that she “had been determined to have met her maximum potential” after the first seven days, and therefore, only qualified for “custodial care” for the rest of her inpatient stay.

The US District Court for the Western District of Pennsylvania agreed with the plaintiff that the administrative decisions had failed to consider whether the plaintiff needed SNC to maintain her level of functioning.  The Medicare Skilled Nursing Facility Manual Chapter 2 §214.3 states that skilled nursing care “must be provided with the expectation that… [1] the condition of the patient will improve materially in a reasonable and generally predictable period of time, or [2] the services must be necessary for the establishment of a safe and effective maintenance program.”  Furthermore,

The Secretary’s regulations state that “[t]he restoration potential of a patient is not the deciding factor in determining whether skilled services are needed. Even if full recovery or medical improvement is not possible, a patient may need skilled services to prevent further deterioration or preserve current capabilities.” 42 C.F.R § 409.32(c) (emphasis added).

In light of the foregoing, the Court reversed the Secretary’s decision.  Because the Secretary had failed to consider the alternative reason for rehabilitative SNC, the decision could not be affirmed as a matter of law.

Anderson v. Sebelius, 2010 U.S. Dist. LEXIS 113550

In Anderson, the sixty-year-old Plaintiff required 24-hour supervision to remain safe in her home after a second stroke rendered her incontinent, cognitively impaired, and immobile.  Her physician certified six times that Anderson needed SNC for a 60-day period; however, she was denied coverage after the first of six physician-certified periods.  The US District Court for the District of Vermont held that the ALJ had incorrectly concluded that SNC is “not covered when a patient’s condition is stable and unlikely to change.”

To the contrary, “a patient’s chronic or stable condition does not provide a basis for automatically denying coverage for skilled services.”  The court cited the Medicare Benefit Policy Manual, which states:

The determination of whether a patient needs skilled nursing care should be based solely upon the patient’s unique condition and individual needs, without regard to whether the illness or injury is acute, chronic, terminal, or expected to extend over a long period of time. In addition, skilled care may, depending on the unique condition of the patient, continue to be necessary for patients whose condition is stable. § 40.1.1 (emphasis added).

Furthermore, a physician’s decision as to whether SNC was reasonable and necessary is to “be viewed from the perspective of the condition of the patient when the services were ordered and what was, at that time, reasonably expected to be appropriate treatment for the illness or injury throughout the certification period.”  § 40.1.2.1.  The Court held that the ALJ’s hindsight determination that the patient remained stable and did not improve during the certification period was inappropriate.  “The fact that skilled care has stabilized a claimant’s health does not render that level of care unnecessary. An elderly claimant need not risk a deterioration of her fragile health to validate the continuing requirement for skilled care.” (quoting Folland ex rel. Smith v. Sullivan).

Looking Ahead…

These rulings will likely benefit those with chronic conditions and disabilities.  Representative Joe Courtney, Democrat of Connecticut, led a group of seventeen House Democrats in objecting to the administration’s interpretation of the law.  According to their letter:

Beneficiaries are frequently told that Medicare will not cover skilled services if their underlying condition will not improve. For example, as people with multiple sclerosis are often not likely to improve, skilled services such as physical, occupational and speech therapies that are necessary to slow the progression of the disease, or maintain current function, are denied. As a result, these individuals’ conditions deteriorate — frequently leading to more intense, more expensive services, hospital or nursing home care.

The government has not announced whether it will challenge the decision.

OIG Issues Guidance on Individual Permissive Exclusions

On October 20, the Department of Health & Human Services Office of the Inspector General, (”OIG”) released, Guidance for Implementing Permissive Exclusion Authority Under Section 1128(b)(15) of the Social Security Act (”Guidance”).  The Guidance provides owners, officers, and managing employees an opportunity to better evaluate their exposure and limit any liability resulting from their control over an entity subject to OIG enforcement action.

Section 1128(b)(15) of the Social Security Act provides the Secretary of HHS the authority to exclude owners, officers, and managing employees “of an entity that has been excluded or has been convicted of certain offenses.”  OIG, having been delegated this authority by the Secretary, has published this internal advisory document setting out nonbinding factors to be considered in deciding whether to impose an individual permissive exclusion, under § 1128(b)(15).

Historically, OIG has not often exercised its permissive authority to exclude individuals from participation in federal health programs.  According to OIG’s “List of Excluded Individuals,” 28 individuals controlling an excluded or convicted entity have themselves been excluded pursuant to § 1128(b)(15), including 16 owners or operators, 7 officers and 5 practitioners.  The Guidance may indicate a new enforcement direction for OIG.

According to DLA Piper, the Guidance “is further evidence that OIG is serious about its recent focus on individual accountability and that it intends to exclude officers and managing employees, even without evidence that those individuals knew or should have known about the conduct giving rise to the entity’s criminal liability or exclusion.”  Skadden takes a similar position, stating:

This guidance finds OIG asserting the breadth of its authority by creating a presumption in favor of exclusion in certain cases and endorsing a new strict liability exclusion standard in other cases.  These enforcement positions appear likely to accelerate the government’s recent efforts to hold individuals accountable for corporate wrongdoing.

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