Recommended Reading: Joan Krause’s “Skilling and the Pursuit of Healthcare Fraud”

In her latest article, Skilling and the Pursuit of Healthcare Fraud, which is forthcoming in the University of Miami Law Review, Joan Krause suggests that the Supreme Court’s decision in Skilling v. United States could have a paradoxical effect on health care fraud prosecutions.  In Skilling, the Supreme Court rejected Jeffrey Skilling’s argument that 18 U.S.C. §1346, which criminalizes frauds designed “to deprive another of the intangible right to honest services,” is unconstitutionally vague.  In so doing, the Court strictly cabined the scope of Section 1346, holding that it only applies to “offenders who, in violation of a fiduciary duty, participated in bribery or kickback schemes.”  While the Skilling decision is expected to lead to fewer honest services prosecutions overall, Professor Krause believes that it may lead to an increase in honest services prosecutions founded on health care kickbacks.  Professor Krause notes that “bribery or kickback schemes” are activities that “have particular salience in health care.”  She also points out that there are strategic advantages to prosecuting healthcare fraud cases pursuant to Section 1346, including a “focus on the physician-patient relationship as the locus of the misbehavior” that may appeal to juries and the fact that violations of Section 1346 carry longer maximum prison terms than violations of the Anti-Kickback Statute.

In the conclusion to Professor Krause’s article, she acknowledges that “the broader use of the honest services theory in health care kickback cases would raise a host of analytical issues” and then provides a fascinating elaboration.  According to Professor Krause, “the characterization of the physician-patient relationship as a fiduciary one is, perhaps surprisingly, far more complex than first appears.”  The physician is not a typical fiduciary.  For one, the physician’s duty is not all-encompassing — his or her duty of honesty does not extend beyond the provision of medical diagnosis and treatment — and, for another, unlike a traditional fiduciary, a physician has no control over his or her patient’s money.  Moreover, and of central relevance for the prosecution of health care fraud as honest services fraud,  “the physician’s duty to disclose information to patients generally is handled through the state-based law of informed consent rather than through broad federalized notions of fiduciary duty, and few informed consent cases or statutes require the disclosure of financial rather than treatment-related information.”  (For an in-depth discussion of whether disclosure of financial information should be required, see Seton Hall Law’s Center for Health & Pharmaceutical Law & Policy’s December 2010 white paper The Limits of Disclosure as a Response to Financial Conflicts of Interest in Clinical Research and June 2011 Journal of Health & Life Sciences Law article An Argument Against Embedding Conflicts of Interest Disclosures in Informed Consent).

If physicians are not legally obligated to disclose financial information to their patients, in what sense do they deprive those patients of their honest services by accepting a kickback?  Professor Krause sets forth a number of possibilities, including (1) that kickbacks are per se deceptive, (2) that kickbacks are deceptive unless proved otherwise, and (3) that “in the absence of a clear duty to disclose a kickback under fiduciary law or informed consent” kickbacks are not deceptive and there can be no honest services prosecution without “additional evidence of harm to the patient — if not tangible harm, at least proof that the physician’s decisionmaking (i.e., the services owed), was in fact influenced in a way that could have affected the patient’s treatment.”  While the third option is arguably “a truer reading of the doctrine,” Professor Krause predicts that it “likely will be found wanting by jurists who believe the disclosure duties imposed under current health law are incomplete.”

I highly recommend Professor Krause’s article for its comprehensive and insightful analysis of the Skilling case’s potential paradoxical effect on health care fraud cases, but also for its thought-provoking concluding section and the numerous timely questions it raises about the relationship between physicians’ duties to their patients and the federal duty to provide honest services.

Distinguished Guest Practitioner Mark Swearingen Lectures on Trends in Healthcare Law Enforcement

On Wednesday, September 21, 2011, Distinguished Guest Practitioner Mark Swearingen spoke at Seton Hall Law School on a number of healthcare law enforcement topics that were of keen interest to the audience of health lawyers and health lawyers-in-training.  Mr. Swearingen, who graduated from Seton Hall Law in 1998, is a shareholder at Hall, Render, Killian, Heath & Lyman, P.C., a large  healthcare law boutique based in Indianapolis, Indiana.

Among other things, Mr. Swearingen discussed two recent Stark Law cases: United States v. Tuomey Healthcare System, in which a jury award of $49.4 million is currently on review in the Fourth Circuit Court of Appeals, and United States v. Bradford, a summary judgment decision from the Western District of Pennsylvania that also largely favors the government.

As the court in Bradford explains, the case involved two physicians, Kamran Saleh and Peter Vaccaro, who leased a nuclear camera so that they would no longer have to refer their patients to the local hospital, Bradford Regional Medical Center, for nuclear imaging.  Faced with the prospect of losing over a third of its $2,274,094 in annual gross nuclear medicine revenues, the hospital responded by threatening to revoke the doctors’ admitting privileges.  Lengthy negotiations ensued, at the end of which the hospital agreed to sublease the camera from the two physicians; the camera remained at the physicians’ offices but other physicians with privileges at the hospital could use it.

Four local physicians who “provide[d] the same or similar services to patients as Drs. Saleh and Vaccaro” brought a qui tam action alleging that the sublease violated the Anti-Kickback and Stark Acts and that the defendants falsely certified compliance with those laws in connection with claims submitted to Medicare in violation of the False Claims Act.  The court agreed that the defendants violated the Stark Act, because the amounts the hospital paid under the sublease were inflated to account for the referrals the hospital lost as a result of Drs. Saleh and Vaccaro’s decision to lease their own camera.  The court deferred on the Anti-Kickback and False Claims Act charges, because it was unable to conclude at the summary judgment stage that the defendants acted knowingly.

As Mr. Swearingen commented, even if the sublease arrangement in Bradford was, on paper, above approach, the facts leading up to it were not good for BRMC and Drs. Saleh and Vaccaro.  That the hospital responded to losing business to the two physicians by first threatening to revoke their privileges and then entering into a financial arrangement that brought them back into the fold suggests that the sublease was about more than the use of a camera.  The facts in Tuomey were in several key respects similar to those in Bradford.  Tuomey, too, involved a hospital faced with the prospect of a group of physicians performing outpatient procedures elsewhere, which would have meant a loss to the hospital of $6-9 million in annual revenues.  To keep the physicians in the fold, the hospital entered into part-time employment contracts with them.  The government alleged– and the jury presumably found–that the contracts would have been money-losers for the hospital but for the associated facility and other fees that the hospital was able to bill in connection with the physicians’ services.

Mr. Swearingen also highlighted the fact that the hospital in Bradford lost the case despite having obtained an expert opinion that the amount it paid for the camera under the sublease was fair market value.  The defendant hospital in Tuomey similarly lost despite having obtained not one but two valuation analyses and multiple legal opinions.  The hospital in Tuomey relied on an advice of counsel defense and, notably, attorney-client privileged communications were entered into evidence at trial.  Going forward, Mr. Swearingen emphasized, fair market value and legal opinions “will be scrutinized” and “may not be dispositive.”

Fraud and Abuse and Why Little Fish Matter

[Ed. Note: We are pleased to welcome Andy Braver, Esq. to Health Reform Watch. Andy is a health care attorney and candidate for the Master of Laws in Health Law degree at Seton Hall University School of Law. Prior to entering the LL.M. program, Andy spent five years as a healthcare provider, running a state of the art medical diagnostic imaging center.  During that time, he dealt with many important health law issues faces by providers today, including Fraud and Abuse, Medicare and Medicaid licensing and reimbursement, state and private accreditation organizations, private payers, electronic health records, and HIPAA and other privacy issues, to name just a few. We look forward to bringing the law based perspective of a provider to the blog.]

Fraud and Abuse is a current health law hot button. Whether looked at from the standpoint of exploding healthcare budgets, or the amount of money being removed from the system by crooked and nefarious actors, there are many opinions on the problem, and what should be done about it.  My views on the subject are colored by my experience as both an attorney and a former healthcare provider.

Recently, I was lucky to hear an enlightening and informative panel discussion with a US Attorney whose post was created specifically to fight health care Fraud and Abuse, and a defense attorney, who spends a good portion of his time defending clients in prosecutions brought by this AUSA’s office.  One of the issues that struck me listening to the discussion is how the lack of resources to fight the problem so greatly affects the reality of how the problem is fought.  Put more succinctly, the government admits it can only go after the big offenders, and those that present immediate danger and potential harm to patients.  As a result, “small time” offenders are often left to flourish without much fear of finding themselves looking down the barrel of a False Claims Act [31 U.S.C. 3729, et seq.] or Anti-Kickback Act [41 U.S.C. 51, et seq.] criminal or civil investigation.

While the overall theory is understandable, does it make sense for the government to make these admissions?  Of course, the government needs to get the most from the resources it has to combat the problem– while also ensuring patient safety is not compromised in any way– but why advertise that limited resources limit investigations and prosecutions?  How then is an attorney to provide counsel in the following scenario: your client, an honest specialty medical provider who has unique offerings to the community (whether specialized training or advanced equipment not found elsewhere), is having trouble breaking into the local market because of a lack of referrals.  It turns out that the competition, in order to protect their business, is paying the gatekeeper (the doctor and/or office manager) at a few referring physician offices for each patient referred (Medicare, Medicaid and even private insurance), in the form of cash or gift cards, paid in small denominations, every week or two.  While the effect this might have on patient care is debatable, there is no question that these payoffs are illegal [41 USC 1320(b)] and [US Attorney Criminal Resource Manual].  There is some question, however, on how the problem should be handled.

The cynic and former healthcare provider in me wants to advise my client to take the easiest route and match the payoff since there is little to fear, but of course, I would NEVER offer such advice, nor condone such behavior.  How, then, do you level the playing field and advise a client who is trying to survive running an honest business, faced with dishonest competition that know that as long as they only cheat a little bit, they will not end up in any kind of trouble?

Is it realistic to ask your client to bring a Qui Tam action against those involved in the payoff schemes?  Was a whistleblower action meant to be used in this kind of small provider situation involving a mixture of federal and private insurance claims?  There will be no treasure trove of documents evidencing the payoffs, no smoking-gun Visa gift cards, and while your client may know the truth about the payoffs, it will ultimately turn into a he-said she-said case without assistance from professional investigators with badges.  Who knows what impact this will have on your client’s business, and whether other referring physicians will want to get involved with your trouble-maker client in the future?  Perhaps you might be able to convince an employee from the dishonest competition to come forward as a relator in order to share in the proceeds of any settlement [31 U.S.C. 3730(d)].  But will the government intervene in a small, low-profile case, then allowing your client to return to life as a full-time medical provider rather than a Qui Tam relator.

I believe that the government would be properly allocating its resources by, from time to time, looking into “smaller” complaints.  These low-hanging-fruit cases are ripe for the picking, and, from my experience as a provider competing in this kind of an environment, a little bit of deterrence will go a long way.  If nothing else, dishonest providers will be more likely to play by the rules if they are fearful that breaking them will result in in bad consequences, and honest practitioners will not have to become experts on the Qui Tam process.

ACOs: OIG Guidance, CMS regulations, and Interpretive Tasks

Tim Greaney has already posted on the FTC/DOJ Joint Policy Statement on antitrust scrutiny of ACO applicants, and Jordan Cohen posted on the  CMS’s draft regulations on the Medicare Shared Savings Program (”MSSP”) for ACOs.   In this post, I’ll describe some interesting structural issues presented by the OIG’s notice on proposed waivers, which cross-references the CMS MSSP draft regulations. The fundamental issue for the OIG is how “virtual organizations” — those not fully integrated in a corporate or financial sense — can serve the integrative goals of the Affordable Care Act while staying on the right side of the web of federal laws prohibiting physician self-referral, kickbacks, and payments to reduce care to Medicare beneficiaries.  The OIG notice proposes to square this circle in two steps.

The OIG two-step; Step One

The Fraud & Abuse problem with ACOs is that they are intended to achieve the efficiency and quality gains of formally integrated delivery systems (Geisinger, Mayo Clinic)  through contract-based aggregation of providers.  This less formal integration, of course, implicates the dealings generally prohibited by the Physician Self-Referral Law (”Stark”), Anti Kickback Statute (”AKS”), and the Prohibition on Hospital Payments to Physicians to Induce Reduction in Services law (which provides for civil money penalties for violations) (”CMP”).  The OIG notice proceeds very incrementally.  In large part, the OIG proposes to affirm that a CMS determination that an ACO qualifies for participation in the MSSP signifies the adoption of quality and fiscal protections sufficient to allow a waiver of Stark, AKS, and CMP enforcement for purposes of the distribution of shared savings.  In addition, and to the extent “necessary for and directly related to” the ACOS’s participation in the shared savings plan, the OIG proposes to waive enforcement under the AKS and CMP provisions with respect to conduct that falls within a Stark exception.  In outline form, then, the OIG proposes as its initial waiver guidance:

• Stark. The OIG proposes to waive enforcement of Stark for
  • The actual distribution of MSSP to and among ACO participants, and ACO providers/suppliers for conduct during a year in which shared savings were earned; and
  • “activities necessary for and directly related to the ACO’s participation in and operations under the” MSSP.

• AKS. The OIG proposes to waive enforcement of AKS under two scenarios:
  • The distribution of shared savings under the MSSP
    • to and among ACO participants, and ACO providers/suppliers for conduct during a year in which shared savings were earned; and
    • for any financial relationships between ACO participants and ACO providers/suppliers necessary for and directly related to the ACO’s MSSP participation that implicate Stark, but fall within a Stark exception.

• CMP. The OIG proposes to waive enforcement of the CMP provisions under two scenarios:
  • Distribution of shared savings from a hospital to a physician so long as
    • “the payments are not made knowingly to induce the physician to reduce or limit medically necessary items or services”; and
    • the hospital and physicians were ACO participants or providers/suppliers during the year in which the shared savings were earned.
  • In the context of financial relationships among ACO participants and/or providers/suppliers necessary for and directly related to the ACO’s MSSP operations, that implicate Stark but that fall within a Stark exception.

The OIG two-step; Step Two

In Step One, the OIG proposes waivers for arrangements that are central to the MSSP gain distributions, or that are central to the ACO enterprise and are structurally within Stark exceptions.  The OIG goes on to solicit input on the need for additional waiver guidance, for conduct that is “beneficial” to ACO participation in the MSSP, but that also protects “patients and programs from harms caused by fraud and abuse.”  The OIG solicits input on:

• Arrangements related to establishing the ACO;
• Arrangements between or among ACO participants or providers/suppliers related to ongoing operations of the ACO and achieving ACO goals;
• Arrangements between the ACO, its ACO participants and/or providers/suppliers and outside individuals or entities;
• Distributions of shared savings or similar payments from private payers;
• Other financial arrangements for which a waiver would be necessary;
• Miscellaneous: duration of waivers, scope of the waivers listed above in “Step One,” and additional safeguards; and
• Arrangements in which providers are subjected to risk, particularly in the “two-sided risk model” in the CMS draft regulations on the MSSP.

“Necessary for and directly related to”

It is pretty clear that the lion’s share of the OIG’s waiver work will be done by determining whether or not an ACO has been qualified by CMS for the MSSP.  There will be waivers, however, even under Step One, that will require the OIG to evaluate the proposed arrangements.  Stark enforcement regarding the actual distribution of shared gains, for example, will be waived under the proposal for CMS-qualified ACOs.  But Step One proposes additional waivers “for activities necessary for and directly related to the ACO’s participation in and operations under the” MSSP.  Similarly, AKS and CMP waivers are proposed for dealings between ACO participants that are within Stark exceptions so long as they are “necessary for and directly related to the ACO’s MSSP participation.”  A standard based on what is “necessary for and directly related to” an ACO’s MSSP participation will, then, do a lot of the waiver work.  It is not a self-defining standard, and further elaboration from the OIG (by providing examples, perhaps) will lend clarity to the OIG’s waiver guidance.

Attribution, assignment, and patient notice

ACO commentators (here (subscription required) and here)  have observed that the method by which patients are “attributed” to ACOs is central to ACOs’ financial and structural planning.  Attribution was the term used in the literature to refer to the formal determination that a particular Medicare patient should “count” for assessing the gain (and possibly the loss) experienced by the ACO.  The CMS draft regulations on the MSSP, consistent with the terms of the Affordable Care Act, use the term “assignment” rather than attribution.  The CMS proposal’s treatment of assignment, or attribution, will engender much discussion here and elsewhere in the coming weeks.

One important issue, however, seems to have been resolved.  In the literature on ACOs, it has not been clear whether Medicare beneficiaries would know whether or not they had been assigned or attributed to an ACO; consistent with continuing commitment to beneficiaries’ right to choose providers within the Medicare fee for service system, the discussion contemplated the possibility that ACOs would organize a beneficiary’s care, gain payments as a result of efficiencies, but never inform the beneficiary of his “attribution” to an ACO.

Donald Berwick highlighted the requirement of patient notice in his Perspective published in the New England Journal of Medicine on the day of the regulations’ release.  The CMS draft regulations on the MSSP explain the requirement of patient notice in the following terms:

[W]hile the statute refers to the assignment of beneficiaries to an ACO, we would characterize the process more as an “alignment” of beneficiaries with an ACO as the exercise of free choice by beneficiaries in the physicians and other health care providers and suppliers from whom they receive their services. . . .  Therefore, an important component of the Shared Savings Program will be timely and effective communication with beneficiaries concerning the Shared Savings Program, their possible assignment to an ACO, and their retention of freedom of choice under the Medicare FFS program.

That piece of consumer protection regulation was absolutely essential.  It would be odd indeed, after decades of struggle with patient protection in managed care systems, were patients to be engaged without their knowledge in a system built on economic incentives to providers directed to care management.  We’ll post more about assignment and other ACO issues in the coming weeks.

HHS-OIG Issues “Roadmap” to Help New Physicians Steer Clear of Fraud and Abuse

As others have noted, earlier this month the HHS-OIG issued “A Roadmap for New Physicians: Avoiding Medicare and Medicaid Fraud and Abuse,” a pamphlet which it developed to educate medical students, residents, and fellows about fraud and abuse law.  The HHS-OIG was spurred to act after a 2010 survey it conducted revealed that less than half of the nation’s medical schools provide instruction on the topic.  The Roadmap is sensibly organized around the relationships physicians have with (1) payers, with an emphasis on Medicare, (2) fellow health care providers, and (3) vendors.  It uses well-chosen “case examples” to make the rules governing those relationships concrete.  The Roadmap concludes with a helpful list of additional resources, a list of steps to take “[i]f you are engaged in a relationship you think is problematic or have been following billing practices you now realize were wrong,” and a plug for the HHS-OIG’s Provider Self-Disclosure Protocol.

As David Harlow points out on his HealthBlawg, the release of the Roadmap coincides with an effort by the federal government to re-think current fraud and abuse laws to facilitate the development of accountable care organizations and other efforts to better organize and pay for health care.  Harlow notes that “the fraud and abuse and self-referral rules, intended as a brake on bad behavior in the context of fee-for-service medicine, become less relevant — and even become an impediment — to new systems of care and new systems of financing of that care.”  (Professor Frank Pasquale discusses the move to modify or waive the rules in more depth here.)  Of course, fee-for-service medicine is not going to disappear overnight, so today’s doctors in training need to learn about the current legal regime.

The government’s new willingness to look beyond drug and device companies to hold physicians personally accountable for fraud and abuse violations should make it easier to get the attention of doctors in training.  The Roadmap highlights HHS-OIG’s ongoing investigation into many of the orthopedic surgeons who allegedly received kickbacks from the hip and knee implant manufacturers who entered into a landmark settlement with the U.S. Attorney for the District of New Jersey in 2007.  In May 2010, an orthopedic surgeon in Florida paid $650,000 to resolve claims that he was compensated by two device companies ostensibly for consulting services but allegedly “for ordering, or causing to order, … orthopedic products.”

The Roadmap also reminds physicians that transparency is coming, using large, orange text to emphasize that “[t]he public will soon know what gifts and payments a physician receives from industry.”

Centripetal Accountability in Health Care: Accountable Care Organizations, A Legal and Practical Overview

Legal scholar Kevin Werbach once observed that the internet has been centripetal, “pull[ing] itself together as a coherent whole.” For Werbach, network formation theory both explains these centripetal tendencies, and some of “the pressures threatening to pull the Internet apart” into balkanized units. Werbach counsels that governments need to “catalyz[e] network formation, and moderat[e] the forces that push towards excessive concentration of power.” These recommendations should also govern new efforts to create “virtual networks” of care in the wake of the new health reform legislation (the ACA).

Critics of the ACA have frequently complained that the legislation does not do enough to improve quality or to cut costs. However, the act did create incentives for new alliances of hospitals and doctors, known as “Accountable Care Organizations.” Now provider lobbies are demanding some pretty dramatic changes to health care regulation in order to implement ACOs. In this post, I want to explain what ACOs are, and why they challenge traditional health care regulatory models.

What’s an ACO?

Elliott Fisher, director of the Center for Health Policy Research at Dartmouth Medical School, describes the “three key attributes” of ACOs: “organized care, performance measurement, and payment reform.” Fisher has argued that insurers are not well-positioned to improve the quality of health care because they “have largely focused on negotiating favorable prices within relatively open networks of providers” instead of trying to improve the health care their members received. (Private insurers have little incentive to keep current subscribers healthy over the long term, since at least half of subscribers on average churn into different plans within three years of signing up with a given plan.) He believes that a “virtual network” of physicians could do a better job, if they teamed up with hospitals. ACO refers to this legal alliance, which would be entitled to receive payments in exchange for cutting costs or improving quality.

In an ACO, an “extended hospital medical staff” (or “a hospital-associated multi-specialty group practice”) can join forces with a hospital and agree to be compensated via a lump sum payment. If the group manages to keep overall costs beneath the lump sum payment, it can share the gains among its members. Each part of the team also has an incentive to work together to keep those they care for healthy. In an ideal world, the ACO responds to the concerns about fragmentation discussed in last month’s symposium on the Elhauge-edited volume recently released by Oxford University Press.

ACO Skeptics

But there are skeptics. Jeff Fisher worries about shadowy new pressures on providers that patients won’t be aware of:

Consumers would not be aware that they were being treated by ACOs. Rather, they would be “attributed” to them: virtual patients of virtual organizations. Aggregate health spending for attributed patients would be tracked, and increases in that spending would be capped using a form of “shadow capitation.” ACOs that lived within the caps would get their fees increased. Those that overspent would see their fees reduced or frozen.

Gail Wilensky believes that hospitals may dominate ACOs, predicting that “if they are the only entities receiving the payment, it will have a bad imbalance between groups of physicians and the hospitals.”

Robert Pear has also reported that a “frenzy of mergers involving hospitals, clinics and doctor groups eager to share costs and savings” worries consumer advocates and antitrust scholars.

“In an environment where health care providers are financially rewarded for keeping costs down,” [a lawyer for the Consortium for Citizens with Disabilities] said, “anyone who has a disability or a chronic condition, anyone who requires specialized or complex care, needs to worry about getting access to appropriate technology, medical devices and rehabilitation. You don’t want to save money on the backs of people with disabilities and chronic conditions.”

“The new law is already encouraging a wave of mergers, joint ventures and alliances in the health care industry,” said Prof. Thomas L. Greaney, an expert on health and antitrust law at St. Louis University. “The risk that dominant providers and dominant insurers may exercise their market power, individually or jointly, has never been greater.” Lobbyists and industry groups are bearing down on the Federal Trade Commission and the Justice Department, which enforce the antitrust laws, and the inspector general’s office at the Department of Health and Human Services, which ferrets out Medicare fraud.

Those agencies are writing regulations to govern . . . accountable care organizations. They face a delicate task: balancing the potential benefits of clinical cooperation with the need to enforce fraud, abuse and antitrust laws. . . . [According to one insurer strategist,] “In some markets, the dominant hospital is like the sun at the center of the solar system. It owns physician groups, surgery centers, labs and pharmacies. Accountable care organizations bring more planets into the system and strengthen the bonds between them, making the whole entity more powerful, with a commensurate ability to raise prices.”

Why do ACOs implicate fraud, abuse and antitrust laws? At a recent government workshop on ACOs, participants addressed “circumstances under which collaboration among independent health care providers in an ACO permits ACO providers to engage in joint price negotiations with private payers without running the risk of engaging in illegal price fixing under the antitrust laws.” HHS also explored “the different ways in which the Secretary may exercise waiver authority or create new exceptions and safe-harbors related to the physician self-referral law, the Anti-kickback statute and the CMP law in order to encourage the creation and development of ACOs.” The AMA has pushed for “explicit exceptions to the antitrust laws” for participating doctors. And, as Pear reports, the president of the Federation of American Hospitals says “the fraud and abuse laws should be waived altogether.”

Evolving Fraud, Abuse, and Antitrust Laws

What is one to make of all this? Many health law scholars have been skeptical of fraud and abuse laws for some time. For a taste of the scholarship, consider this excerpt from Mark A. Hall’s 1988 article in the Journal of Health Politics, Policy, & Law:

Someone uninitiated to the intricacies of health care financing would find it startling to learn that it is potentially a felony punishable by five years imprisonment for a rural hospital to recruit a badly needed specialist to the community, for a doctor to discount his services by waiving insurance deductibles and coinsurance, or for a health care institution to pay its doctors a bonus as a reward for efficient practice. A case can be made that each of these activities falls within the literal terms of the broadly worded Medicare and Medicaid referral fee statute. Enticing a physician to join the medical staff necessarily involves implicit or explicit incentives to refer the physician’s patients to that hospital. Price discounts can be characterized as payments to refer one’s patients to one’s self for treatment. And efficiency bonuses can induce doctors to admit patients to a particular hospital or encourage them to direct patients to a particular insurance plan.

Because these and other absurd applications of the referral fee concept are within a plausible reading of the federal referral fee statute, the statute has been a constant thorn in the side of the health care industry since the 1977 enactment of its current form. However, some relief is now in sight. The Department of Health and Human Services (DHHS) has issued a series of ‘‘safe harbor’’ regulations specifying payment practices that are deemed legal despite their potential referral incentive.

Over the past 20 years, regulation of fraud and abuse has waxed and waned. In 1996, James F. Blumstein concluded that “the modern American healthcare industry is akin to a speakeasy—conduct that is illegal is rampant and countenanced by law enforcement officials because the law is so out of sync with the conventional norms and realities of the marketplace.” Nevertheless, as Joan Krause has shown, there are important public purposes behind these laws, and it’s troubling to see a hospital leader simply advocate for them to be swept away tout court in the case of ACO’s.

Antitrust issues are also complex here, and perhaps help demonstrate the wisdom of delaying the implementation of at least this part of the ACA for a few years. As Tim Greaney has demonstrated time and again, providers have had little to fear from antitrust laws over the past decade. His 2007 article on physician cartels memorably summarizes the situation for doctors:

For over thirty years the United States Department of Justice and Federal Trade Commission (“Agencies”) have confronted bands of businessmen who have steadfastly refused to pay attention to legal precedent, repeated governmental pronouncements, and administrative sanctions imposed on their colleagues. The conduct revealed in these cases evidences a willingness to blatantly disregard the law by repeatedly undertaking arrangements already deemed illegal by the enforcers or by concocting schemes that raise untested but dubious justifications.

[T]hese cases involve physicians, some grouped in associations numbering in the thousands and almost always proceeding with the advice of business consultants and counsel. The conduct challenged by the government involves the formation of loosely-structured organizations, ranging from Independent Practice Associations to Preferred Provider Organizations (PPO) to other kinds of loose “networks” that collectively bargain with employers or managed care organizations for provider contracts.

It’s hard to read Greaney’s work on the topic without concluding that a toxic mix of “doctrinal shortcomings, political pressures, and institutional constraints” have severely compromised antitrust enforcement already. Greaney’s 2004 article on antitrust in health care, Chicago’s Procrustean Bed, also suggests that health care antitrust has, for years, been biased “strongly [in] favor defendants” due to the persistent failures of Chicago-inspired doctrine to reflect “market imperfections” in health care.

Reduced Regulation Should Be Conditioned on Better Calibrated Payments

One could draw two lessons from these trends. Perhaps policymakers should be cautious about granting overly broad antitrust exemptions to ACO’s in a field where competition law’s prerogatives have already been whittled away.

Or one could call health care antitrust a largely failed project, and start regulating dominant ACO’s as veritable health care utilities, as critical to regional infrastructure as roads, electricity, or water. The logic of concentration seems inevitable in the field: insurers and providers have long been in an arms race for bargaining power. Joe White has explained the dynamic:

One might wonder why consolidation among insurers [in the US over the past 20 years] did not allow them to resist the providers’ demand for increased payments. The simple answer is that there were two concentrated parts of the market and one fragmented part. The insurers had to choose between fighting a full-pitched battle with the providers or exploiting their own market power vis-à-vis the employers. Raising premiums to employers was a lot easier.

In theory, employers could have demanded restrictive networks (at lower prices). But since everyone had agreed that employees did not like restrictive networks, and providers (especially hospitals) were not willing to discount much to get into such networks, there were not many available for purchase. Individual employers could not invent such a product; they could only shop around and find the relatively best deal by customizing other contract terms, such as cost sharing. The system left substantial room for entrepreneurship, but this entrepreneurship did not serve to improve health care values.

What can be done in a health care marketplace that’s increasingly looking like the “clash of the titans?” Perhaps inspired by the utility model, Maryland has implemented a hospital payment system where “all payers—public and private—pay the same rates.” If ACO’s deliver a coup de grace to insurers’ efforts to control provider prices, it’s only fair that the same governmental authorities behind the ACO movement condition its rewards on the responsibility to provide affordable care.

ACA stands for Affordable Care Act, not Accountable Care Organizations Above All Else. ACOs may work, but only if policymakers can replace classic instruments of health care regulation with calibrated financing decisions that reflect new industry realities.

Are GPO’s Suppressing Safer Devices?

S. Prakash Sethi has called group purchasing organizations (GPO’s) an “undisclosed scandal in the U.S. health care industry.” Mariah Blake’s article in the Washington Monthly on GPO’s is a sobering “must-read” for those concerned about the future of health care in the US. She writes about the entrepreneur Thomas Shaw, who’s invented a syringe that drastically reduces the risk of bloodstream infections for patients and healthcare workers. (According to Barry Lynn, who’s also written on the issue, “each year about 6,000 medical workers come down with HIV or infectious hepatitis from such accidents, and dozens end up dead.”) Shaw’s brilliant innovation “added only a few pennies to the cost of production,” but it’s rarely used today. Blake traces the non-diffusion of this innovation to a complex set of deregulatory decisions relating to GPO’s.

GPO’s are supposed to use purchasing clout on behalf of buyers (like hospitals) to drive down prices from sellers. But it appears that these intermediaries, like large Wall Street firms, are often more interested in fees and payments from the sell-side than they are in helping the buy-side. As one analyst testified before the DOJ and FTC, “the compensation of most GPO management is almost always based on . . . fee income [from suppliers] rather than on the real savings to hospital members.”

Shaw’s bad luck was to enter the market shortly after a massive GPO, Premier, struck a multiyear deal with supplier Becton Dickinson. As Blake notes, “Premier signed a $1.8 billion, seven-and-a-half-year deal with Becton Dickinson [whereby its 1700 member hospitals] had to buy 90 percent of their syringes and blood collection tubes from” Becton Dickinson, which also “landed similar deals with all but one major GPO.” Lynn says that “many hospital buying agents won’t even dare to talk to Shaw for fear of upsetting their more powerful suppliers.”

How did the GPO-Supplier nexus grow so strong? Blake does a terrific job explaining developments that transmogrified many cost-cutting intermediaries into self-serving middlemen:

To keep costs in check, in the 1970s many medical facilities began banding together to form group purchasing organizations, or GPOs. The underlying idea was simple: because suppliers generally give price breaks to customers who buy large quantities, hospitals could get better deals on, say, gauze or gloves, if a group of them came together and bargained for ten cases, rather than each hospital buying a case on its own. . . . By decade’s end, virtually every hospital in America belonged to a GPO.

Then, in 1986 Congress passed a bill exempting GPOs from the anti-kickback provisions embedded in Medicare law. This meant that instead of collecting membership dues, GPOs could collect “fees”—in other industries they might be called kickbacks or bribes—from suppliers in the form of a share of sales revenue. (For example, in exchange for signing a contract with a given gauze maker, a GPO might get a percentage of whatever the company made selling gauze to members.) The idea was to help struggling hospitals by shifting the burden of funding GPOs’ operations to vendors. To prevent abuse, “fees” of more than 3 percent of sales were supposed to be reported to member hospitals and (upon request) the secretary of [HHS].

[This shift] turned the incentives for GPOs upside down. Instead of being tied to the dues paid by members, GPOs’ revenues were now tied to the profits of the suppliers they were supposed to be pressing for lower prices. This created an incentive to cater to the sellers rather than to the buyers. . . . Before long, large suppliers began using “fees”—sometimes very generous ones—along with tiered pricing to secure deals that locked GPO members into buying their products. . . .

This situation only grew thornier in 1996, when the Justice Department and the Federal Trade Commission overhauled antitrust rules and granted the organizations protection from antitrust actions, except under “extraordinary circumstances.” . . . Within a few years, five GPOs controlled purchasing for 90 percent of the nation’s hospitals, which only amplified the clout of big suppliers.

There are a few lessons here. Within the confines of competition law, the message should be clear: Einer Elhauge was right to state in 2003 that “Serious antitrust concerns remain about exclusionary agreements that charge higher prices to GPOs or hospitals that won’t commit to limiting purchases from rivals of dominant manufacturers to a small (often 5-10%) percentage of their purchases.” The broader lesson is that intermediaries in many fields are often tempted to put their own profits ahead of the entities they’re ostensibly serving. In the endless battle for compensation between providers, hospitals, and insurers, there are many profitable opportunities to shift alliances. Meanwhile, entrepreneurs like Thomas Shaw, patients, and thousands of medical workers are enduring unsafe conditions that could easily be remedied.

Family-Run Medical Equipment And Billing Companies Enterprise Lead To Prison Time

The Miami Herald reports that Laura and David Hernandez, as well as other family members, were sentenced by U.S. District Judge Adalberto Jordan for running a fraudulent Medicare operation.

The Herald states:

Over the past decade, the family-run enterprise of medical equipment and billing companies submitted more than $17 million in false claims to Medicare, they admitted in court.

Their total take: about $6 million.

The family-run enterprise started as a sole medical equipment company and later transformed into “a string of equipment businesses in Miami-Dade.”  David Hernandez, a Cuban immigrant who is said to have completed formal schooling up to only the ninth grade, was the mastermind of the conspiracy:

David Hernandez, in the lead role, recruited four people to register as the official owners of four equipment-supply companies to conceal his participation in the scam, according to the court statement. Those ”nominee” owners, members of another family, were charged in a separate Medicare fraud indictment.

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Bipartisan Effort to Amend the False Claims Act

American Health Lawyers Association reports that Senators are seeking to amend the False Claims Act:

Senators Charles Grassley (R-IA), Richard Durbin (D-IL), Patrick Leahy (D-VT), Arlen Specter (R-PA), and Sheldon Whitehouse (D-RI) introduced recently the False Claims Act Clarification Act of 2009 (S. 458), which would amend the False Claims Act (FCA) to strengthen a whistleblower’s ability to bring a qui tam action on behalf of the government, among other things.

This amendment would also clarify some of the ambiguity surrounding the FCA.  The AHLA stated:

The bill includes a provision clarifying that the FCA was intended to extend to any false or fraudulent claim for government money or property, whether or not the claim is presented to a government official or employee, whether or not the government has physical custody of the money, and whether or not the defendant specifically intended to defraud the government.

This clarifying amendment may have a significant impact on two areas of health care litigation.  First, the amendment would strengthen qui tam actions against pharmaceutical companies where the pharmaceutical companies do not actually present a claim to the government, such as with off-label drug marketing cases.  Second, the amendment may strengthen “bootstrapped” qui tam actions, where the qui tam relator brings a FCA action for Anti-Kickback Statute and/or Stark Law violations (physician “self-referral” cases), despite the lack of  any specific FCA violation, and because the Anti-Kickback Statute and Stark Law themselves lack a private right of action.

At the very least, the proposed amendment, which would facilitate the use of qui tam actions, is further evidence of the federal government’s increased reliance, and an intention to continue in such reliance, upon qui tam actions as a means of both regulatory and punitive enforcement.