Antitrust.doc by shenreng9qgrg132

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  Year in Review
                 American Health Lawyers Association
                      Year in Review 2008-2009

Table of Contents……………………………………………..................................2





Food and Drug Law/Life Sciences………………………………………………..46

Fraud and Abuse…………………………………………………………………….76

Health Reform……………………………………………………………………….131

Health Spending…..………………………………………………………………...142

Health Information Technology.………………………………………………….143

Healthcare Access….………………………………………………………………151

Hospitals and Health Systems…………………………………………………...152

Insurance/Managed Care………………..………………………………………...166

Long Term Care……………………………………………………………………..178


Medical Malpractice………………………………………………………………...201

Medical Records…………………………………………………………………….214


Patient Safety………………………………………………………………………..255


Quality of Care……………………………………………………………………....294




U.S. Court In Arkansas Rejects Cardiology Clinic’s Antitrust
Action Against Hospital, Insurer
The U.S. District Court for the Eastern District of Arkansas dismissed August 29, 2008 an
antitrust action brought by the Little Rock Cardiology Clinic (clinic) against Baptist Health
and Arkansas Blue Cross and Blue Shield (Arkansas Blue Cross).

The court said the claims against Arkansas Blue Cross were time-barred and held the
claims against Baptist Health failed to define a valid relevant product or geographic

The clinic and certain cardiologists (plaintiffs) initially sued Baptist Health, which operates
five hospitals in Arkansas, in November 2006. Plaintiffs amended the complaint in 2007
to add Arkansas Blue Cross and certain related affiliates.

The complaint alleged claims against defendants under Sections 1 and 2 of the Sherman
Act, seeking treble damages and injunctive relief under the Clayton Act.

The alleged wrongdoing began after the 1997 opening of the Arkansas Heart Hospital in
Little Rock, whose part owners were cardiologists who practiced at the clinic. Before that
time, these cardiologists participated in the Arkansas FirstSource network and were on
staff at the Baptist Hospital in Little Rock.

According to plaintiffs, after Arkansas Heart Hospital opened, the clinic and the physicians
who practiced there were excluded from the FirstSource network, allegedly to protect
Baptist Health from competition.

In May 2003, Baptist Health adopted an “economic credentialing policy” to prohibit any
physician from having or maintaining staff privileges at any of its facilities if they held an
interest in a competing hospital. A court enjoined enforcement of that policy in February
2004. See Baptist Health v. Murphy, 226 S.W.3d 800 (2006).

Defendants moved to dismiss on statute of limitations grounds and because the relevant
market alleged was incoherent and therefore incapable of forming the basis to adjudicate
the antitrust claims.

The district court agreed that all the claims against Baptist Health and Arkansas Blue
Cross should be dismissed.

The court held the claims against Arkansas Blue Cross were time-barred because the
action was brought more than four years after the initial termination of their contracts
with the FirstSource network.

In so holding, the court rejected plaintiffs’ argument that Blue Cross’ refusal to reimburse
the cath lab the clinic opened in 2003 was a new and independent act showing a
continuing conspiracy.

According to the court, this action merely represented the unabated initial consequences
of Blue Cross' 1997 decision not to deal with the clinic and its physicians; therefore, no
new actions occurred within the four-year statute of limitations period before the filing of
the complaint.

The court did find, however, that Baptist Health’s adoption of the economic credentialing
policy in 2003 could be regarded as an overt act in furtherance of the alleged
monopolization of a market for hospital services for cardiology patients. Thus, the court
concluded that the antitrust claims against Baptist Health were not time-barred.

But the court went on to hold that plaintiffs failed to allege a valid relevant market to
support its Section 1 and 2 claims.

The court said plaintiffs’ relevant market allegations could be interpreted in two ways: (1)
as defined in terms of cardiologists’ services, or (2) as including both cardiologists’
services and hospital services.

As to the first definition, the court said the Section 2 claim must be dismissed because no
defendant offered the same services that the cardiologists did, i.e. the hospital did not
compete in the market for cardiology services.

Likewise, the Section 1 claim failed because, where as here Baptist Health lacked market
power, plaintiffs failed to allege any adverse effect on competition among cardiologists
such as increased prices or a decline in the quality or quantity of cardiology services.

As to the alternative interpretation of plaintiffs’ market allegations, the court refused to
find the services offered by a hospital and the services offered by a cardiologist to
hospitalized cardiology patients could be lumped into one product market for purposes of
antitrust analysis.

“Assuming . . . that hospitalized cardiology patients require services from both a
cardiologist and a hospital, what follows is not that both sets of services are in the same
product market but rather the opposite—the two sets of services are complements, not
substitutes and therefore are not in the same product market,” the court said.

The court also noted one overarching problem with plaintiffs' market definition—i.e. its
attempt to limit the relevant market to services provided to privately insured individuals.

The relevant market is all persons who need cardiologists' services, including those with
coverage through Medicare, Medicaid, and other public programs, the court said.

Finally, the court took issue with the complaint’s definition of the relevant geographic
market as the cities of Little Rock and North Little Rock, finding the area too narrow and
undermined by other factual allegations in the complaint.

Little Rock Cardiology Clinic, P.A. v. Baptist Health, No. 4:06CV01594 JLH (E.D. Ark. Aug.
29, 2008).

U.S. Court In California Allows Physician To Pursue Sherman Act
Claims Alleging Conspiracy To Deny Hospital Privileges
The U.S. District Court for the Northern District of California allowed September 22, 2008
a physician to pursue Sherman Act antitrust claims against several hospital board
members and those who served on various hospital committees for allegedly conspiring
to cause the denial of plaintiff's privileges.

Although the court found the pleading sufficient to withstand a motion to dismiss the
antitrust claims, it granted the motion with respect to the plaintiff’s state law claim for
breach of the implied covenant of good faith and fair dealing.

Plaintiff Richard B. Fox is a pediatrician with a specialty in the care of critically ill children
who require mechanical ventilation. He practiced at Good Samaritan Hospital (GSH).

In 1999, GSH adopted a rule requiring any physician seeking practice privileges at the
hospital to designate two physicians with identical privileges to serve as backups in the
event of the first physician's unavailability.

Fox refused to designate the back-ups and GSH denied him pediatric intensive care

Fox contended the rule change was part of an anticompetitive scheme designed to favor
a competing group of physicians with whom defendants had a relationship.

Fox sued several defendants alleging their actions violated the Sherman Act and state

In their motion to dismiss, defendants argued that claims under the Sherman Act are
barred unless commenced within four years after a defendant commits an act that injures
a plaintiff.

Fox filed suit on March 18, 2008, so any claim that accrued before 2004 would otherwise
be time-barred unless a new injury intervened.

Defendants argued Fox's alleged injuries would have been caused when GSH adopted the
initial identical privilege rule in April 1999 and subsequently suspended Fox's privileges
for failing to comply with that rule in June 1999.

The court agreed, however, with Fox’s argument that he was entitled to apply for new
privileges every two years and was then subject to a new adverse decision denying those
privileges in response.

Under those facts if proven, there was a continuing conspiracy characterized by new and
independent acts occurring within the 2004 to 2008 period, the court said.

Turning to Fox’s claims for unreasonable restraint of trade in violation of Sherman Act
Section 1, the court found that in construing the complaint in the light most favorable to
Fox, his pleading sufficiently raised issues of fact as to whether GSH and defendants
conspired to exclude Fox from offering pediatric intensive care services at GSH.

The court also found Fox adequately set forth the requisite impact on interstate

The court next addressed Fox’s monopolization and attempt to monopolize in violation of
Sherman Act Section 2 claims. A claim for monopolization under Section 2 has two
elements: (1) the possession of monopoly power in the relevant market; and (2) the
willful acquisition or maintenance of that power.

The court rejected defendants’ argument that Fox had not adequately alleged defendants'
monopoly power in the relevant market.

Instead, the court found Fox adequately pled that GSH, with its unique pediatric intensive
care program, is a separate geographic market because children born at GSH, where they
receive pediatric care from Fox and other physicians, use that facility’s services

The court also agreed with Fox that defendants have the power to control prices and to
exclude competition in these pediatric intensive care markets because it is difficult for
physicians, such as Fox, to obtain the necessary pediatric certification and privileges from

However , the court did agree with defendants that Fox could not pursue his state law
claims for breach of the implied covenant of good faith and fair dealing under a tort

California courts have “unanimously refused to extend tort remedies outside the
insurance arena,” the court said. Thus, the court dismissed Fox's claim for breach of the
implied covenant of fair dealing with prejudice.

Turning to Fox’s breach of contract claim, the court noted that Fox only alleged he had a
contract with GSH, not with the defendants individually. Accordingly, the court granted
Fox leave to amend “to plead facts, if he can do so in good faith, regarding how [certain
individual defendants] as corporate officers, are liable for an alleged breach of contract
between GSH and Fox.”

Fox v. Piche, No. C 08-1098 RS (N.D. Cal. Sept. 22, 2008).

BMS Agrees To Pay States $1.1 Million For Failing To Meet Court-
Ordered Reporting Requirements
Bristol-Myers Squibb (BMS) agreed to pay $1.1 million to the states for failing to comply
with court-ordered reporting obligations that arose from prior settlements of charges that
the company unlawfully deprived consumers of cheaper generic versions of its drugs
Buspar and Taxol, according to Wisconsin Attorney General J.B. Van Hollen.

BMS also agreed to revised court orders extending its reporting obligations and
establishing monetary penalties for any future violations, the release said.

Under the two prior settlements concerning Buspar and Taxol, BMS paid the states $150
million and agreed to two federal court orders requiring the company to notify the states
of patent litigation settlements with generic drug competitors and also to supply yearly
compliance reports.

In March 2006, BMS reached a settlement with generic drug manufacturer Apotex, Inc. in
a patent infringement lawsuit involving BMS’ drug, Plavix.

According to the states, the Plavix settlement provided by BMS was inaccurate and
incomplete, as were the company’s 2007 and 2008 compliance reports, which did not
disclose “side” arrangements that a company official made with Apotex, the release said.

Bristol-Myers Squibb Agrees To Pay $2.1 Million Penalty For
Failing To Disclose Full Details Of Plavix Deal
Bristol-Myers Squibb (BMS) will pay a $2.1 million civil penalty to resolve a Federal Trade
Commission (FTC) complaint that it failed to disclose certain critical statements it made
to the generic manufacturer Apotex, Inc. as part of a patent settlement involving BMS’
blockbuster blood thinner Plavix.

BMS was required to make full disclosures regarding its dealings with generic drug
manufacturers under a 2003 FTC order, and under new reporting requirements included
in the Medicare Modernization Act of 2003 (MMA).

The complaint is the first to be brought under the MMA provisions, and the fine is the
largest allowed by the statute, FTC said in a press release.

According to the FTC, Apotex during patent settlement negotiations agreed not to launch
its generic version of Plavix for several years and BMS made certain oral statements that
in exchange it would not market an “authorized generic” version of Plavix for the first 180
days after Apotex’s generic entry.

The proposed settlement agreement between Bristol-Myers Squibb and Apotex was
related to Plavix patent litigation pending in a federal trial court in New York.

BMS did not disclose the oral statements to the FTC as required by a 2003 order settling
charges that BMS had entered into agreements with generic drug manufacturers to delay
their entry into the market and by the MMA, which requires the accurate reporting of
certain drug company agreements to the FTC and the Department of Justice (DOJ).

“Filing firms must understand that they can’t reach oral understandings and simply omit
them from their required MMA filings. Otherwise, the very goal of the MMA would be
undermined,” said the FTC’s Acting Bureau of Competition Director David P. Wales.

In May 2007, BMS agreed to plead guilty to two counts of perjury for, among other
things, failing to disclose its oral statements to Apotex and to pay $1 million in criminal
fines, the maximum amount allowed by statute.

FTC Alleges Drug Companies Agreed To Unlawfully Delay Entry
Of Generic AndroGel
The Federal Trade Commission (FTC) announced February 2, 2009 that it filed suit in
federal district court challenging agreements in which Solvay Pharmaceuticals, Inc. paid
generic drug makers Watson Pharmaceuticals, Inc. and Par Pharmaceutical Companies,
Inc. to delay generic competition to Solvay’s testosterone-replacement drug AndroGel.

Both generic companies had sought regulatory approval from the Food and Drug
Administration (FDA) to market generic versions of AndroGel. In those filings, they
certified that their products did not infringe the only patent Solvay had relating to
AndroGel, and that the patent was invalid.

According to FTC, Solvay agreed to pay the generic companies to abandon their patent
challenges and agree not to market a generic version of AndroGel until 2015. As a result
of these agreements, the complaint alleges, defendants are cooperating on the sale of
AndroGel and sharing the monopoly profits, rather than competing with Solvay.

The suit seeks a final court judgment declaring that Solvay’s agreements with Watson
and Par violate Section 5(a) of the FTC Act, and injunctive relief restoring competitive
conditions and barring the defendants from engaging in similar or related conduct in the

The complaint was filed in the U.S. District Court for the Central District of California.

FTC Says Legislation Banning “Pay-For-Delay” Payments Is
Needed To Prevent Higher Drug Costs

The Federal Trade Commission (FTC) gave its resounding support March 31, 2009 to
legislation that would ban so-called “pay to delay” payments as part of patent
settlements between brand and generic drug companies.

In testimony before the House Energy and Commerce Subcommittee on Commerce,
Trade, and Consumer Protection, FTC Commissioner J. Thomas Rosch said a recently
introduced bill (H.R. 1706) to prohibit such anticompetitive settlements “can provide a
comprehensive solution to a problem that is prevalent, extremely costly, and subverts
the goals of the Hatch-Waxman Act.”

Subcommittee Chairman Bobby Rush (D-IL) introduced the bill along with Committee
Chairman Henry Waxman (D-CA) to ban the practice of “exclusion” or “reverse”
payments in which a brand-name company pays or provides value to the generic
company to abandon a patent challenge if the generic company agrees to delay
marketing its generic drug.

In his opening statement, Rush said “the intent of Hatch Waxman is being undermined by
these uncompetitive legal settlements and consumers are losing out on the considerable
savings from generic drugs.”

Rush emphasized the bill does not ban all settlements in drug patent cases, but rather
prohibits the brand-name manufacturer from giving something of value to the generic
manufacturer to delay generic entry on the market.

These types of deals have increased in prevalence, Rush noted, after various court
decisions made it more difficult for FTC to bring antitrust suits to stop exclusion

For example, in March 2005, the Eleventh Circuit vacated the FTC’s decision that
settlement agreements between Schering-Plough Corporation and two generic drug
manufacturers were anticompetitive. See Schering-Plough Corp. v. Federal Trade
Commission, 402 F.3d 1056 (11th Cir. 2005).

Rosch said in his testimony that settlements with payments to generic patent challengers
“had essentially stopped” in the wake of antitrust enforcement between 2000 and 2004.
But following appellate court decisions upholding the legality of pay-to-delay settlements,
these types of agreements are on the rise.

Rosch cited an analysis finding that in 2007 almost half of all final patent settlements
involved compensation to the generic challenger and an agreement to delay generic

Diane E. Bieri, Executive Vice President and General Counsel for the Pharmaceutical
Research and Manufacturers of America, argued before the panel that a “case by case”
approach in analyzing patent settlements instead of an across-the-board ban “serves the
best interests of patients, health care, and competition.”

Bieri said blanket prohibitions on certain types of settlements could divert valuable
resources from research and development to expensive litigation. “In the face of these

alternatives, it is better for companies, the courts and consumers if the parties are
permitted to negotiate settlements that could bring the generic product to consumers
before the patent expires and save considerable litigation costs.”

Ninth Circuit Affirms Judgment That Agreement Did Not Delay
Generic Entry, But Says Monopolization Claim Against Brand-
Name Drug Maker May Proceed
The Ninth Circuit affirmed January 13, 2009 a jury verdict finding Kaiser Foundation
Health Plan Inc. could not maintain a restraint-of-trade claim under Section 1 of the
Sherman Act against Abbott Laboratories Inc. and Geneva Pharmaceuticals Technology
for entering into an agreement that allegedly delayed the market entry of a generic
version of Abbott’s brand-name drug Hydrin (terazosin hydrochloride).

The appeals court reversed, however, summary judgment to Abbott on Kaiser’s
monopolization claim under Section 2 of the Sherman Act. According to the appeals
court, Kaiser raised a genuine issue of material fact as to whether the brand-name drug
maker obtained one of its patents on terazosin hydrochloride by fraudulently omitting
certain relevant information in its patent application.

Abbott began selling terazosin hydrochloride in tablet and capsule form beginning in
1987. Over the years, Abbott held a number of patents covering various terazosin
hydrochloride formulations. Of particular interest to this litigation was the '207 patent,
which was issued in April 1996 on a crystalline polymorph of terazosin hydrochloride
(Form IV) and a related process.

Generic drug manufacturer Geneva entered the picture in the 1990s when it filed
Abbreviated New Drug Applications (ANDAs) for generic versions of terazosin

Pursuant to the Drug Price Competition and Patent Term Restoration Act of 1984, known
as the Hatch Waxman Act, Geneva’s ANDAs included “Paragraph IV” certifications that
either the Abbott patents at issue were invalid or would not be infringed by its generic
version. See 21 U.S.C. § 355(j)(2)(A)(vii).

As permitted under the Hatch-Waxman Act, Abbott filed various patent infringement suit
and received an automatic 30-month stay of the Food and Drug Administration’s (FDA's)
approval of the ANDAs.

Two days after FDA approved Geneva’s capsule ANDA, Abbott and Geneva entered into a
contract in which Geneva agreed to keep its generic capsule off the market subject to
various conditions and Abbott agreed to pay Geneva $4.5 million dollars per month
during this period.

According to the opinion, between 1993 and 1998, seven generic drug manufacturers
filed ANDAs seeking FDA approval of generic terazosin hydrochloride. Abbott filed 17
patent infringement suits during this time period.

The Federal Circuit eventually ruled Abbott’s '207 patent was invalid. Abbott then
terminated its contracts with Geneva. Once Geneva’s generic entered the market, Abbott
lowered the price of brand-name terazosin hydrochloride that it had previously offered to
Kaiser from between 67 and 70 cents per tablet to 10 cents per tablet.

Kaiser, a large purchaser of prescription drugs, sued Abbott and Geneva in the U.S.
District Court for the Central District of California under Sections 1 and 2 of the Sherman
Act and analogous provisions of California law.

Kaiser’s suit was transferred to the Southern District of Florida as part of multi-district
litigation. That court granted summary judgment to Abbott on Kaiser’s monopolization
claim but then transferred the case back to the California federal district court.

Kaiser’s Section 1 claim went to a jury, which determined that Abbott and Geneva had
not caused any delay in generic entry of terazosin hydrochloride on the market.

On appeal, the Ninth Circuit affirmed the jury’s verdict in Abbott's and Geneva’s favor.

At trial, Abbott and Geneva presented evidence that their agreement did not delay
Geneva’s marketing of its generic terazosin hydrochloride because Geneva did not want
to risk bringing its product to market without the protection of a court decision holding
the ‘207 patent was invalid.

According to Kaiser, Geneva’s defense was based on the advice of counsel and therefore
the district court erred in not allowing discovery of the attorneys' privileged opinions.

But the appeals court disagreed, saying Geneva did not rely on an “advice-of-counsel”
defense at trial; rather, Geneva asserted its Board of Directors did not want to undertake
the business risk of marketing its generic terazosin hydrochloride so long as the validity
of the ‘207 patent was in question. This decision was made despite advice from counsel
that Geneva would likely prevail in the ‘207 patent litigation, the appeals court

The appeals court reversed, however, the Florida federal district court’s grant of
summary judgment to Abbott on Kaiser’s Section 2 Sherman Act monopolization claim.

The district court concluded that Abbott was entitled to immunity under the Noerr-
Pennington doctrine as it was exercising its First Amendment rights to petition the
government without fear of antitrust liability.

Kaiser asserted two exceptions to the Noerr-Pennington framework applied—that Abbott
engaged in “sham” litigation in bringing the 17 patent infringement lawsuits and that
Abbott obtained its ‘207 patent fraudulently, so-called Walker Process fraud. See Walker
Process Equip., Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965).

The appeals court concluded the “sham” litigation exception did not apply, noting Abbott
prevailed in seven of the 17 patent infringement lawsuits and had plausible arguments in
all of the lawsuits.

But the Ninth Circuit found Kaiser had raised a material issue of fact as to whether Abbott
knowingly omitted certain information in its ‘207 patent application that may have
affected the issuance of the patent. Thus, the appeals court said the action should not
have been decided on summary judgment.

Kaiser Found. Health Plan Inc. v. Abbott Labs., Inc., Nos. 06-55687, 065578 (9th Cir.
Jan. 13, 2009).

Sixth Circuit Finds Group Boycott Allegations Insufficient Under
Either Per Se Or Rule Of Reason Test
The Sixth Circuit affirmed December 22, 2008 a district court's dismissal of antitrust
claims alleging a group boycott by a group of related insurers.

The appeals court found the district court did not err in finding the complaint failed to
adequately plead a violation of Section 1 of the Sherman Act based on a per se analysis
or rule-of-reason test.

Total Benefits Planning Agency maintained contracts with Anthem Blue Cross and Blue
Shield; Anthem Life Insurance Company, Inc.; Anthem Health Plans of Kentucky, Inc.;
Anthem Insurance Company, Inc. (collectively Anthem); and Cornerstone Broker
Insurance Services Agency for the sale of group life and health insurance policies in Ohio,
Indiana, and Kentucky.

Total Benefits developed "an innovative strategy for controlling health care costs" by
utilizing "a 51-year old federal tax law to ‘refinance’ health-care costs by raising
deductibles on existing group insurance policies and administering benefits through a
medical expense reimbursement plan."

In September 2004, Anthem advised Total Benefits that the strategy "was not in the best
interest of Anthem or the more traditional insurance agencies," and in June 2005,
Anthem severed its agency relationship with Total Benefits.

Total Benefits and four of its insurance agents (collectively, Total Benefits) sued Anthem
and Cornerstone (collectively, defendants) alleging they conspired to blacklist and
organize an industry boycott against Total Benefits in violation of the Sherman Act, 15
U.S.C. § 1, after Total Benefits refused to relinquish the strategy. Total Benefits also
alleged defamation, libel, tortious interference with contract, conspiracy, and breach of
contract under state law.

Defendants moved to dismiss and the trial court initially denied the motion. However,
following two subsequent Supreme Court decision, Leegin Creative Leather Prods., Inc. v.
PSKS, Inc., 127 S. Ct. 2705 (2007), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544,
127 S. Ct. 1955, 1974 (2007), the trial court eventually agreed to dismiss the action.

The appeals court first addressed Total Benefits' argument that the district court erred in
failing to find the complaint adequately pled a violation of Section 1 of the Sherman Act
based on a per se violation. The appeals court noted that when the case was originally
filed, there were two possible grounds for the application of a per se antitrust claim: (1) a
"group boycott" alleging a horizontal agreement among competitors, and (2) a vertical
price fixing conspiracy.

However, in Leegin, the Supreme Court held that all vertical price restraints are to be
judged under the rule-of-reason standard, thus leaving a horizontal agreement as the
only way a per se violation could have occurred here.

The appeals court found that Total Benefits failed to plead in their amended complaint the
necessary factual allegations to prove a horizontal agreement. The appeals court pointed
out that the Supreme Court has held that a parent company and its wholly owned
subsidiaries are incapable, as a matter of law, of conspiracy. Copperweld Corp. v.
Independence Tube Corp., 467 U.S. 752, 769 (1984).

Here, the "sister" relationship between each of the Anthem defendants made them
incapable, as a matter of law, of conspiring to form a horizontal group boycott in violation
of Section 1 of the Sherman Act, the appeals court held.

The appeals court also found no merit in Total Benefits' "hub and spoke" conspiracy
argument, finding the complaint still must show some horizontal relationship between

Next, the appeals court turned to Total Benefits' argument that the court erred in
dismissing its claims under the rule-of-reason test. In order to state a claim under the
rule-of-reason test, a plaintiff must include in the complaint allegations demonstrating:
(1) the defendants "contracted, combined or conspired among each other"; (2) "the
combination or conspiracy produced adverse, anticompetitive effects within relevant
product and geographic markets"; (3) "the objects of and conduct pursuant to that
contract or conspiracy were illegal"; and (4) "the plaintiff was injured as a proximate
result of that conspiracy." Crane & Shovel Sales Corp. v. Bucyrus-Erie Co., 854 F.2d 802,
805 (6th Cir. 1988).

The first element requires a plaintiff to allege the existence of the conspiracy in more
than "vague and conclusory" terms, a fact that the Supreme Court reiterated in Twombly,
the appeals court said. However, the appeals court found that the "allegations in the
amended complaint fall significantly short of the required pleading threshold."

The court noted that the complaint failed to allege when defendants "joined the Anthem
conspiracy, where or how this was accomplished, and by whom or for what purpose."

"Generic pleading, alleging misconduct against defendants without specifics as to the role
each played in the alleged conspiracy, was specifically rejected by Twombly," the appeals
court held.

Total Benefits also failed to identify a relevant product market, the appeals court noted.

Total Benefits Planning Agency, Inc. v. Anthem Blue Cross Blue Shield, No. 07-4115 (6th
Cir. Dec. 22, 2008).

Healthcare System Resolves Allegations It Tried To Exclude
Competitors From Managed Care Networks, Texas AG Says
Memorial Hermann Healthcare System has settled allegations it engaged in practices that
discouraged health insurers from entering into contracts with certain competing hospitals
in violation of state antitrust laws, Texas Attorney General (AG) Greg Abbott announced
January 26, 2009.

The AG’s complaint, filed in Texas state court, alleged that beginning in 2005 Memorial
Hermann unreasonably restrained competition among acute care inpatient hospitals by
trying to prevent competing physician-owned hospitals from being added to area
managed care networks.

Memorial Hermann is the largest hospital system in the Houston area with about 20% of
the market share.

According to the complaint, one Memorial Hermann competitor, Houston Town and
Country Hospital (Town and Country), was unable to obtain an in-network contract with
any major health insurer in the Houston market except CIGNA.

After learning of Town and Country’s agreement with CIGNA, Memorial Hermann
indicated it intended to terminate its contract with the insurer. The health system later
renegotiated its contract with CIGNA and obtained substantial rate concessions “far in
excess of any reasonably foreseeable economic impact on Memorial Hermann from
CIGNA’s inclusion of Town and Country within its network,” the complaint alleged.

The same scenario played out with Aetna, resulting in Memorial Hermann imposing a
25% rate increase on the insurer, according to the complaint.

Town and Country Hospital eventually closed, the complaint said.

Pursuant to a final court order, Memorial Hermann is permanently enjoined for five
years from engaging in any practices with any health plan to boycott or refuse to deal
with competitor hospitals.

The health system also agreed to pay the AG $700,000 in partial reimbursement of the
reasonable and necessary costs and fees associated with the investigation of its business

Memorial Hermann did not admit any liability or wrongdoing in agreeing to the settlement
and final court order. Rather, it decided to resolve the antitrust allegations “[t]o avoid the
time, uncertainty and expense of protracted litigation.”

U.S. Court In Illinois Rejects Omnicare Antitrust Claims Alleging
UnitedHealth-PacifiCare Merger Violated Sherman Act
A federal court in Illinois granted summary judgment to UnitedHealth Group
(UnitedHealth) and PacifiCare Health Systems (PacifiCare) in an antitrust action brought
by institutional pharmacy Omnicare Inc. alleging the merger of the two insurers violated
the Sherman Act.

Although the court had previously denied defendants’ motion to dismiss, Omnicare, Inc.
v. UnitedHealth Group, Inc. No. 06-Omnicare-6235 (N.D. Ill. Sept. 28, 2007), it found on
summary judgment that OmniCare had failed to raise a genuine issue of material fact
that the insurers conspired to coordinate their negotiations with the pharmacy so as to fix
and depress prices concerning their Medicare Part D contracts.

Plaintiff Omnicare Inc. is the nation’s largest provider of drugs and services to long term
care facilities, according to the opinion. In July 2005, UnitedHealth entered into an
agreement with Omnicare in which UnitedHealth would act as a Medicare Part D
prescription drug plan, with Omnicare agreeing to accept reimbursement from
UnitedHealth for providing pharmacy services to its enrollees.

PacifiCare also entered into discussions with Omnicare but the negotiations were
unsuccessful and PacifiCare ultimately broke off negotiations

During this time, PacifiCare and UnitedHealth began merger discussions and finalized a
merger agreement in July 2005.

Omnicare and PacifiCare eventually resumed negotiations and reached an agreement.
According to Omnicare, it felt compelled to accept PacifiCare’s below-market offer and
other terms favorable to the insurer.

Once the merger was completed, UnitedHealth, now the owner of PacifiCare, notified
Omnicare that it was withdrawing the UnitedHealth plans from its original agreement with

Omnicare, and then switched them to the PacifiCare plan, with its lower reimbursement

Omnicare filed a complaint against UnitedHealth, PacifiCare, and RxSolutions, Inc.
(collectively, defendants), alleging they violated the Sherman Act’s prohibition on
contracts or conspiracies in restraint of trade, as well as parallel state law prohibitions.

Omnicare also alleged state law claims of conspiracy to defraud, fraudulent
misrepresentation, and unjust enrichment. Defendants moved for summary judgment.

The U.S. District Court for the Northern District of Illinois granted the motion, finding
Omnicare failed to establish a genuine issue of material fact that defendants engaged in a
contract, combination, or conspiracy in restraint of trade.

While the court recognized some circumstantial evidence that defendants may have acted
in concert, it found that none of the evidence tended to exclude the possibility the alleged
conspirators acted independently.

The court rejected Omnicare’s contention that the merger agreement by its own terms
established the existence of a conspiracy in restraint of trade.

A provision requiring UnitedHealth to approve any PacifiCare transaction in excess of $3
million specifically excluded PacifiCare’s Part D contract. Moreover, such a provision is
relatively common in merger agreements to ensure the acquired company does not
assume any major liabilities for which the acquirer would be responsible.

Omnicare also argued PacifiCare’s bargaining strategy, i.e. walking away from the initial
negotiations, made no economic sense because it compromised PacifiCare's ability to
receive Part D certification.

But the court disagreed, emphasizing that PacifiCare’s strategy in fact succeeded—given
that it still obtained its Part D certification and, ultimately, more favorable terms in its
agreement with Omnicare.

“At its core Omnicare’s theory would require the court to hold that a bargaining strategy
that was ultimately successful and saved PacifiCare money was nevertheless illogical and
contrary to its economic interest,” the court observed.

The court also was not convinced that Omnicare was compelled to accept the lower
reimbursement rate with PacifiCare. Omnicare made no attempt to bargain further with
PacifiCare and was a “sophisticated” party, the court said.

Finally, the court rejected Omnicare’s view that premerger communications and
information exchanges between UnitedHealth and PacifiCare raised a genuine issue as to
the existence of a conspiracy.

While acknowledging that UnitedHealth “did not scrupulously enforce the segregation of
its due diligence team,” the court nonetheless found “that fact alone cannot alter the
generally benign nature of the information exchanged.”

The court noted the information was exchanged late in the merger process and consisted
of averages and ranges rather than specific bargained-for rates.

The court also granted summary judgment to defendants on Omnicare’s state law claims.

Omnicare, Inc. v. UnitedHealth Group, Inc., No. 06 C 6235 (N.D. Ill. Jan. 16, 2009).

Amgen Will Pay $200 Million To Ortho Biotech To Settle Antitrust
Pharmaceutical manufacturer Amgen will pay Ortho Biotech Products L.P. $200 million to
settle litigation alleging that Amgen violated antitrust laws by offering discounts to
oncology clinics on Amgen's Neupogen, Neulasta, and Aranesp products, Amgen said in a
July 11, 2008 press release.

Ortho Biotech, a subsidiary of Johnson & Johnson, will agree to dismiss its pending
litigation in New Jersey district court under the terms of the settlement.

Amgen did not admit to any wrongdoing as part of the settlement agreement.

"We are pleased to have reached a settlement that puts this litigation behind us. We
believe eliminating the expense and uncertainty of this suit is in the best interest of
shareholders," said Kevin Sharer, Amgen's chairman and chief executive officer.

Health Systems Reaches Preliminary Settlement Of Lawsuits
Alleging Conspiracy To Depress Nurse Wages
Two health systems have reached preliminary settlements of respective class actions
alleging they conspired with hospitals in their area to keep nurses’ wages at artificially
low levels.

According to documents filed in the U.S. District Court for the Northern District of New
York, Northeast Health Inc. of Troy, N.Y. and its subsidiary entities Samaritan Hospital
and Albany Memorial Hospital reached a $1.25 million preliminary settlement of the class
action pending against it there. In March 2009, St. John Health struck a $13.6 million
preliminary deal to end a similar lawsuit against it in the U.S. District Court for the
Eastern District of Michigan.

The cases are part of five class actions filed in federal courts in Albany, Chicago,
Memphis, San Antonio, and Detroit alleging that hospitals violated federal antitrust laws
by regularly exchanging detailed and non-public information about the compensation
each was paying or was willing to pay its RN employees.

According to the lawsuits, which seek treble damages for class members as well as fees
and costs, absent such conspiracy, hospitals in the areas where the suits were filed would
have substantially increased RN compensation in order to attract a sufficient number of
nurses to their facilities. Instead a nationwide nursing shortage remains, the complaints

Both health systems denied the plaintiff nurses’ allegations and did not concede or admit
any liability in agreeing to the preliminary settlement. Instead, the health systems said
they agreed to settle “to avoid further expense, inconvenience, and the distraction of
burdensome and protracted litigation.”

Shortly before St. John’s preliminary settlement, the Michigan federal district court found
that Mount Clemens General Hospital, another defendant in the suit, was not entitled to
summary judgment in the nurses’ class action.

Mount Clemens argued that its largely unionized nurse workforce could not establish the
requisite antitrust injury because their wages were not set through a competitive process.

However, the court distinguished cases cited by the defendant hospital, noting in
those decisions the defendant entities did not compete with each other.

Here, the defendant Detroit-area hospitals “compete among themselves for the services
of RNs—or, at least, those RNs who are not union members—and the Court likewise must
assume, for present purposes, that Defendants have reduced this competition by
agreeing among themselves on the compensation they will pay these RNs.”

“To the extent that some members of the plaintiff class of RNs might also have reduced
or eliminated the competition among themselves for wages by electing to participate in
the collective bargaining process,” the court continued, “does nothing to alter the
anticompetitive nature of Defendants’ alleged collusion—at most, it mitigates the impact
of this anticompetitive conduct upon these union member RNs.”

Cason-Merenda v. Detroit Med. Ctr., No. 06-15601 (E.D Mich. Mar. 24, 2009).

FTC Says It Won’t Challenge Proposed Clinical Integration
The Federal Trade Commission (FTC) said April 14, 2009 that it did not plan at this time
to raise an antitrust challenge to a clinical integration program proposed by physician-
hospital organization (PHO) TriState Health Partners, Inc. (TriState).

FTC said it determined the clinical integration program, which would include joint
contracting by its members with health plans and self-insured employers, had the
potential to lower healthcare costs and improve quality of care.

The Maryland-based PHO asked for the FTC advisory opinion on its proposal to integrate
and coordinate the provision of medical care services to patients by its 200-plus
physicians and Washington County Hospital.

The April 13, 2009 staff opinion letter, signed by Assistant Director of the Health Care
Division of the FTC’s Bureau of Competition Markus H. Meier, found the program, if
implemented as proposed “would be a bona fide effort to create a legitimate joint venture
among its physician and hospital participants that has the potential to achieve significant
efficiencies in the provision of medical and other health care services that could benefit

The program, among other things, would subject physicians to a variety of performance
standards, involve the extensive use of a web-based health information technology
system, and be non-exclusive so purchasers and payors could contract directly with
TriState’s individual participants if they wanted to.

FTC said it would evaluate the price agreements and joint contracting in the program
under the rule of reason, rather than as per se illegal price fixing, because the activities
appeared to be “subordinate and reasonably related” to integration and achieving
potential efficiencies.

In addition, the program if operated as proposed “is unlikely to be able to attain,
increase, or exercise market power for itself or its participants as a result of
implementing the proposed program,” the FTC opinion said.

FTC warned, however, that any evidence of exercise of market power or other
anticompetitive activities by TriState would raise antitrust concerns and could result in
the revocation of the opinion.


Bills Banning Arbitration Clauses In Nursing Home Admission
Agreements Gain Traction
Legislation to prohibit mandatory pre-dispute arbitration clauses in nursing admissions
contracts had some momentum in 2008 in both the House and Senate. The House
Judiciary Committee approved July 30, 2008 the Fairness in Nursing Home Arbitration Act
of 2008 (H.R. 6126), while the Senate Judiciary Committee cleared a similar bill (S.
2838) on September 11, 2008.

Proponents of the legislation argue that arbitration agreements are often buried in
complicated contracts and consumers in many instances do not understand that they are
waiving their legal options.

Proponents also point to unequal bargaining power between facilities and potential
residents as another reason to enact federal legislation on pre-dispute arbitration

But the long term care industry says such legislation would undermine the Federal
Arbitration Act, which was intended to favor arbitration, and unfairly singles out long
term care providers.

A coalition of senior, caregiver, and taxpayer and business advocacy groups sent a letter
to leaders of the Senate Judiciary Committee objecting to the bill.

“We believe [such legislation] . . . would establish a dangerous precedent for the entire
U.S. business community by eliminating the reasonable, intelligent use of arbitration
agreements,” the letter said.

The letter also argued the courts have been effective in invalidating arbitration
agreements that were coercive or lacked adequate consumer protections.

Signatories to the letter included the Alliance for Quality Nursing Home Care, the
American Association for Long Term Care Nursing, and the U.S. Chamber of Commerce.

Mississippi High Court Finds Liability Claims Against Nursing
Home Not Subject To Arbitration Absent Post-Injury Agreement
Healthcare liability claims against a nursing home were not subject to arbitration because
there was no agreement to arbitrate after the injury occurred, the Mississippi high court
said in an August 7, 2008 en banc ruling.

The arbitration provision in the nursing home admissions agreement at issue specified
that claims arising out of the contract or services provided by the facility would be
resolved exclusively by binding arbitration “in accordance with the American Health
Lawyers Association [AHLA] Alternative Dispute Resolution Service Rules of Procedure for
Arbitration” incorporated into the agreement.

Those rules specify that the AHLA Alternative Dispute Resolution Service will administer a
consumer healthcare liability claim on or after January 1, 2004 only if the parties have
reached a written agreement to arbitrate the claim after the injury has occurred.

Because the complaint at issue sought remedies for injuries occurring on January 15,
2005 and June 17, 2005, and the parties did not agree post-injury to arbitrate, the high
court concluded that there was no valid agreement to arbitrate.

The case involved Barbara Jean Barnes, who was an adult with the mental capacity of a
three-year old, and grew up with, and was cared for by, her grandmother. Later, Barnes
moved in with her cousin, Atwood Grigsby, and his wife, Shirley, who became her
primary caretakers. When Atwood became seriously ill, Shirley admitted Barnes into
Magnolia Healthcare, Inc., d/b/a Arnold Avenue Nursing Home (defendant).

Two-and-a-half years later, Shirley Grigsby (plaintiff), acting as the next friend and
conservator of Barnes’ estate, filed a complaint in state court alleging that Barnes was
negligently treated, abused, and sexually assaulted while she was a resident at the
nursing home.

Defendant moved to compel arbitration pursuant to the arbitration provision in the
admissions agreement signed by plaintiff.

The trial court denied defendant’s motion, finding plaintiff did not possess the statutory or
agency authority to bind Barnes to the arbitration agreement.

In a January 2008 ruling, the Mississippi Supreme Court reversed, holding plaintiff
qualified as the resident’s healthcare surrogate under Mississippi law, and therefore could
bind the resident to the arbitration provision.

Following plaintiff's motion for rehearing, however, the latest decision affirmed the trial
court’s refusal to compel arbitration, albeit on different grounds.

Two concurring opinions agreed with the result, but argued that plaintiff had no authority,
as a healthcare surrogate or otherwise, to bind Barnes to an arbitration agreement.

Magnolia Healthcare, Inc. v. Barnes, No. 2006-CA-00427-SCT (Miss. Aug. 7, 2008).

Nonparty To Arbitration Proceeding Entitled To Full Judicial
Review Of Arbitrator’s Discovery Order, California High Court
A discovery dispute involving a nonparty to an arbitration proceeding must be submitted
first to the arbitrator, rather than a judicial forum, but the nonparty is then entitled to full
judicial review of the arbitrator’s discovery order, the California Supreme Court ruled July
17, 2008.

Affirming an appeals court decision, the state high court held the arbitration proceeding
was the proper forum for a nonparty to challenge the discovery sought by a party to the
arbitration, and that the limitations on judicial review of arbitration decisions involving
parties to the arbitration were not applicable to an arbitrator’s discovery order against

Daniel L. Berglund filed a complaint in state court against a number of physicians and
organizations that had provided him medical care, including defendant Arthroscopic &
Laser Surgery Center of San Diego, L.P. (ALSC).

Berglund asserted claims for battery, breach of fiduciary duty, and negligence, alleging,
among other things, that one of his treating physicians was impaired by abuse of

The state court subsequently granted a motion by defendants other than ALSC to compel
contractual arbitration. Because ALSC was not a party to any arbitration agreement,
Berglund’s case against ALSC remained pending in state court.

Berglund later filed in state court a motion to compel ALSC’s production of certain
documents, including medication logs pertaining to “missing medications, prescriptions
and/or other chemical substances” over the period of time he was treated at ALSC.

In denying the motion, the court held that the documents were statutorily privileged
under Cal. Health & Safety Code § 1370.

Berglund and ALSC subsequently settled the court action, but in later arbitration
proceedings against other defendants, Berglund filed with the arbitrator a motion to
compel ALSC to produce documents pertaining to “missing” narcotic medications over a
specified time period.

The arbitrator ruled that he had jurisdiction to rule on the motion, and directed ALSC to
produce the requested documents for in camera review.

The state court denied ALSC’s request for a protective order to prevent the arbitrator
from forcing it to produce documents that had previously been found by the court to be
statutorily privileged. ALSC appealed.

A divided three-justice appellate panel reversed the lower court’s order denying ALSC’s
motion for a protective order, and remanded for further proceedings.

Berglund then petitioned California’s high court for review on the issue of whether an
arbitrator’s discovery order against a nonparty is subject to full judicial review.

The state high court began its analysis by pointing out that, under state statutes [Cal.
Civ. Proc. Code §§ 1283.1 and 1283.05], arbitrators are granted authority over discovery
in certain arbitration proceedings, and are permitted to order discovery from nonparties.

The high court agreed with the majority of the appellate panel that all discovery disputes
arising out of the arbitration must be submitted first to the arbitral, not the judicial

“That conclusion follows logically from section 1283.05, which grants parties to an
arbitration proceedings the right to discovery, including discovery from nonparties;
authorizes arbitrators to order discovery; and expressly gives arbitrators the power to
enforce discovery rights and obligations,” the high court explained.

Next, the high court noted that an arbitrator’s decisions in a dispute between parties to
an arbitration agreement is generally subject to only limited judicial review. Unless the
arbitrator’s award falls into one of the few applicable exceptions outlined in Cal. Civ. Proc.
Code § 1286.2(a), the arbitrator’s award is conclusive and final as to the parties, the
court said.

However, this finality does not extend to nonparties, the court explained, because
without consent a nonparty to an arbitration agreement cannot be compelled to arbitrate
a dispute.

To construe Cal. Civ. Proc. § 1283.05 as “severely restricting a nonparty’s right to judicial
review of an arbitrator’s discovery orders would raise serious separation-of-powers
concerns insofar as it vested in a nongovernmental body (the arbitrator), and removed

from the judicial branch, the authority to determine the legal rights of a person who had
never agreed, contractually or otherwise, to be bound by the nonjudicial body’s
decisions,” the high court explained.

The court also found such a statutory construction would implicate the nonparty’s
constitutional rights to due process under federal and state constitutions.

The high court therefore concluded that Section 1283.05 allows parties to arbitration to
seek discovery and submit discovery disputes to the arbitrator, but also calls for
arbitrator discovery decisions against nonparties to be subject to full judicial review.

Berglund v. Arthroscopic & Laser Surgery Ctr. of San Diego, No. S144813 (Cal. July 17,

Sixth Circuit Refuses To Increase Arbitration Award Against
Hospital In Physicians’ Action
The Sixth Circuit refused December 24, 2008 two physicians’ request to more than
double an arbitration award they won in an action against the hospital where they used
to work.

Affirming a lower court decision, the appeals court said the Federal Arbitration Act (FAA)
supplies the exclusive grounds for modifying an arbitrator’s award.

Here, plaintiff physicians asserted only complaints about the merits of the award, rather
than a clear computation error or other “simple mistake” as contemplated by the FAA.

Physicians Peter Grain and his wife Annette Barnes sued their former employer Trinity
Health, Mercy Health Services Inc., d/b/a/ Mercy Hospital, and others (collectively,
defendants) for allegedly improperly interfering with their medical practices.

The district court found certain state law claims asserted by plaintiffs were subject to
arbitration. Plaintiffs prevailed in the arbitration and were awarded over $1.6 million.
They then asked the district court to confirm the merits of the arbitration decision and to
increase the size of the award to roughly $3.2 million.

The district court upheld the arbitrators’ liability ruling, but refused to increase the award.
Plaintiffs appealed.

As a threshold matter, the Sixth Circuit found the FAA provided specific jurisdiction for
the appeal of the district court’s refusal to modify the arbitration award. See 9 U.S.C. §

The appeals court next upheld the lower court’s refusal to modify the award under the
FAA, 9 U.S.C. §§ 10 and 11, which provides “exclusive” grounds for a “disappointed
party” to obtain relief from an arbitration decision. Hall St. Assocs. v. Mattel, Inc., 128 S.
Ct. 1396, 1406 (2008).

Specifically at issue in this case was 9 U.S.C. § 11(a) and (c), which allows a court to
modify an arbitration award based on “an evident material miscalculation of figures” and
“where the award is imperfect in matter of form not affecting the merits of the

The Sixth Circuit found plaintiffs were not entitled to relief under either provision,
however, because their complaints—concerning how the arbitrators refereed a dispute
between the appropriate dates for calculating the interest award and the sufficiency of
attorneys’ fees—were “merits-based” rather than a computational or scrivener’s error.

According to the appeals court, plaintiffs’ principal argument was really that the award
constituted a “manifest disregard of the law.” But this is not a ground enumerated in the
FAA for modifying an arbitrator’s award, the appeals court said.

The appeals court acknowledged some precedent applying a “manifest disregard of the
law” standard, but called into question the continued viability of those cases in light of
the Supreme Court's Hall decision and noted, moreover, those instances involved
vacating, not modifying, an award.

While other cases in dicta may have suggested a reviewing court could vacate or modify
an arbitration award based on manifest disregard, the Sixth Court characterized such
language as “casual remarks” where the outcome of the case did not hinge on the issue.

Grain v. Trinity Health, No. 08-1410 (6th Cir. Dec. 24, 2008).

Eighth Circuit Finds Arbitration Agreement Valid After Unlawful
Provisions Severed
The Eighth Circuit held February 5, 2009 that an insured under an Employee Retirement
Income Security Act (ERISA)-governed health plan had to arbitrate claims that arose
under the plan even though the arbitration agreement contained provisions that were
unlawful under ERISA.

Because the offending provisions could be severed from the rest of the agreement, the
parties must arbitrate the claims, the appeals court said in reversing a lower court’s
holding that the agreement was invalid.

Plaintiff James G. Franke was enrolled in the Poly-America Medical and Dental Benefits
Plan (Plan) through his employment at Up-North Plastics Inc., an affiliate of Poly-
America, L.P.

During each year of his employment, Franke acknowledged in writing his agreement to
arbitrate any claims associated with his enrollment in the Plan.

After suffering a myocardial infarction, Franke submitted his medical bills to the Plan for
payment, but the Plan refused to pay. Franke appealed to the Plan administrator who
upheld the denial.

Franke then filed suit in federal district court and the Plan moved to compel arbitration.

Although acknowledging that certain portions of the arbitration agreement at issue were
unlawful under ERISA, the Plan argued that those provisions should be severed and the
agreement to arbitrate should be enforced. The district court disagreed, finding the
arbitration agreement unenforceable.

The Eighth Circuit explained that “[w]hen reviewing the enforcement of an arbitration
agreement, we determine only whether there is a valid arbitration agreement and
whether the dispute at issue falls within the terms of that agreement.” If there is a valid
agreement and the dispute is properly within the terms of the agreement, then the
agreement must be enforced, the appeals court added.

Here, Franke conceded that the dispute fell within the agreement, but argued that the
unlawful provisions undermined its validity.

The appeals court distinguished cases relied upon by Franke, finding the provisions here
were not so biased as to render the arbitration process a sham.

Instead, the appeals court found that under the severability clause in the agreement, the
parties agreed that arbitration proceed once any invalid terms were severed.

The appeals court accordingly reversed the district court’s holding and remanded for
entry of an order compelling arbitration.

Franke v. Poly-America Med. and Dental Benefits Plan, No. 08-1637 (8th Cir. Feb. 5,


U.S. Court In Virginia Declines To Dismiss Patient’s EMTALA
Claim Alleging Hospital Failed To Provide Appropriate Screening
A hospital patient who was triaged as “non-urgent” by an emergency department nurse
and subsequently waited nearly 12 hours before being examined by a physician alleged
facts sufficient to establish his claim that the hospital failed to provide him an appropriate
and prompt medical screening examination in violation of the Emergency Medical
Treatment and Labor Act (EMTALA), the U.S. District Court for the Western District of
Virginia ruled September 5, 2008.

Plaintiff, Everett Wayne Scruggs, arrived at the Danville Regional Medical Center (DRMC)
emergency department in the early morning hours of September 3, 2006. He complained
of severe nausea and prolonged dry heaves over the past two days.

A nurse on staff in DRMC's emergency department triaged Scruggs as “non-urgent”
based on her screening examination. Scruggs was then told to wait in the waiting area
until his name was called.

The nurse’s triage report did not include any information on Scruggs’ diabetic
ketoacidosis condition or his history of diabetes.

Nearly 12 hours later, Scruggs was finally examined by Dr. Ramon Gomez, who
conducted a full examination and made several orders, including intravenous fluids,
oxygen, cardiac monitor labs, and a blood sugar test.

An hour later, another emergency department nurse found Scruggs unresponsive and in
cardiac and respiratory arrest. Scruggs was resuscitated and then admitted to DRMC
where he was treated until his discharge on September 18.

In February 2008, Scruggs sued DRMC in federal district court alleging “failure to screen”
in violation of EMTALA and medical negligence.

DRMC moved to dismiss, arguing Scruggs’ complaint did not set forth facts sufficient to
establish that DRMC failed to provide an appropriate screening examination as required
under EMTALA.

The district court concluded Scruggs’ allegations were sufficient to establish an EMTALA
claim against DRMC.

The district court focused on language in Baber v. Hospital Corp. of Am., 977 F.2d 872
(4th Cir. 1992), stating “[w]hether the hospital’s screening is ‘appropriate’ is inherently a
factual determination and is not a candidate for determination on a motion to dismiss.”

In Baber, the Fourth Circuit explained that, under EMTALA, hospitals must apply an
“appropriate” medical screening examination within the capability of the individual
hospital’s medical screening standard, but noted that "hospitals could theoretically avoid
liability by providing very cursory and substandard screenings to all patients, which might
enable the doctor to ignore an emergency medical condition."

The district court distinguished cases on which DRMC's relied, noting in those cases the
hospital provided a higher degree of medical screening at the time the patient presented
himself to the hospital’s emergency department.

While acknowledging that "triage is a necessary part of emergency care utilized to
determine the priority by which patients are examined," the court emphasized that
“triage is not the equivalent to a medical screening examination and merely determines
the order by which patients are seen in the emergency department.

“Plaintiff clearly has outlined a claim within the realm of EMTALA by asserting he did not
receive an ‘adequate’ medical screening based on the 12 hour time period prior to
receiving medical treatment,” the district court said. “This is clearly more than a claim for
negligent triage as proposed by defendant at oral argument.”

Scruggs v. Danville Reg'l Med. Ctr., No. 4:08CV00005 (W.D. Va. Sept. 5, 2008).

U.S. Court In California Finds State's Noneconomic Damages Cap
Does Not Apply To EMTALA Claim
The $250,000 non-economic damages cap in the California Medical Injury Compensation
Reform Act (MICRA) does not apply to a plaintiff's Emergency Medical Treatment and
Labor Act (EMTALA) claim against a hospital, the U.S. District Court for the Eastern
District of California held October 10, 2008.

The case arose out of three visits to Fresno Community Hospital and Medical Center’s
(FCH's) emergency room by minor plaintiff Christina Romar. Romar sued FCH under
EMTALA alleging a disparate screening claim.

According to the court, MICRA's damages cap applies to claims "based on professional
negligence" by healthcare providers. In applying MICRA to EMTALA claims, the court
noted that California courts have adopted the Fourth Circuit's framework, which involves
examining the legal theory underlying the particular claim and the nature of the conduct
challenged to determine whether, under California law, it would constitute "professional

After reviewing extensively the relevant case law, the court concluded that Romar's
disparate screening claim was not a negligence claim "because it is based on disparate
treatment and does not involve the professional medical standard of care/how a
reasonable hospital in FCH’s position would act."

"Although the MICRA cap has been applied to conduct that may not necessarily be viewed
as traditional medical malpractice . . . FCH has cited no cases that apply the MICRA cap

where 'the professional standard of care' was something other than 'that degree of skill of
knowledge, and care ordinarily possessed by members of [the] profession.'"

Accordingly, the court found that the MICRA non-economic damages cap did not apply to
Romar's disparate screening claims under EMTALA.

Romar v. Fresno Community Hosp. and Med. Ctr., No. 1:03-cv-6668 AWI SMS (E.D. Cal.
Oct. 10, 2008).

U.S. Court In Louisiana Upholds Jury’s Verdict That Hospital Did
Not Violate EMTALA
The U.S. District Court for the Eastern District of Louisiana refused to resurrect a
patient’s claims that a hospital violated the Emergency Medical Treatment and Labor Act
(EMTALA), which led to the loss of his eye, finding the jury’s verdict in favor of the
hospital was supported by sufficient evidence.

Vincent Smithson presented to Northshore Regional Medical Center with an injury to his
eye that he said he obtained 10 to 15 minutes earlier while cutting the hospital’s lawn.

Smithson was seen immediately by the emergency room physician, Dr. Ernest Hansen,
who diagnosed plaintiff with an “open globe injury.”

After an ophthalmology consult, Smithson received a CAT scan to see if there was a
foreign body in his eye.

Dr. Terrell Hemelt, the on-call ophthalmology consultant, later told Smithson he needed
surgery for urgent repair on his eye; however, later that afternoon Smithson was
transferred to another hospital.

Smithson eventually received surgery later that evening at the second hospital, but the
eye was subsequently removed because of an infection.

Smithson sued NorthShore Regional Medical Center, Inc. and NorthShore Regional
Medical Center, LLC (Northshore) alleging violations of EMTALA.

After a trial, the jury returned a verdict for Northshore. Smithson then moved for
judgment as a matter of law, or in the alternative, for a new trial. Smithson asserted the
verdict went against evidence provided by his experts that Northshore violated its own
hospital policies.

But the court noted the jury “could have reasonably rejected this evidence.”

“For one thing, plaintiff provided no evidence of how other patients with similar injuries
are treated at Northshore,” the court said.

Accordingly, “there is ample evidence to support the jury’s finding that the hospital did
not screen the plaintiff disparately and thus did not violate the screening requirement of
EMTALA,” the court held.

The court next turned to Smithson’s argument that the great weight of the evidence
established he was not provided stabilizing treatment before his transfer.

The court noted the experts of both parties disputed whether Smithson was stable for

Thus, the court found the jury could have reasonably accepted the testimony of the
physicians who actually treated plaintiff over the testimony of plaintiff’s retained expert

Alternatively, the court explained, the jury could have decided that even if Smithson was
unstable for transfer, his transfer met the conditions for unstabilized transfer under
EMTALA, noting some evidence in the record showing that Smithson had requested the

Smithson v. Tenet Health Sys. Hosps., Inc., No. 07-3953 (E.D. La. Oct. 10, 2008).

First Circuit Affirms Dismissal Of EMTALA Screening,
Stabilization Claims Against Hospital
A lower court properly dismissed claims under the Emergency Medical Treatment and
Labor Act (EMTALA) against a hospital that treated a plaintiff’s spouse for a fatal coronary
condition but did not prescribe a certain treatment in the emergency room (ER) or after
the patient was transferred to its intensive care unit (ICU), the Fifth Circuit ruled
November 13, 2008.

The appeals court found plaintiff Nivia Fraticelli Torres’ action against the hospital may be
viable as state law medical malpractice claims, but did not amount to violations of
EMTALA screening or stabilization requirements.

The appeals court also rejected plaintiff’s alternative argument that EMTALA imposes an
obligation on a hospital when it cannot provide necessary treatments to transfer a critical
patient to obtain stabilization at another hospital that can do so.

Plaintiff’s husband, Guillermo Bonilla Colon, went to Hospital Hermanos Melendez’s ER
complaining of intermittent severe chest pains and arrhythmia over the course of two

ER physicians concluded Bonilla likely suffered a myocardial infarction from nine hours to
two days earlier. The physicians said the infarction had passed and they did not order
thrombolytic treatment, which involves injecting drug agents to break down blood clots.

Bonilla was then admitted to the hospital’s ICU. His condition continued to deteriorate
and roughly a week later he was transferred to another hospital. Several weeks after his
initial ER visit, Bonilla died.

Plaintiff sued the hospital and its physicians (collectively, defendants) under EMTALA,
alleging, among other things, that they failed to provide Bonilla an adequate cardiac
screening in accordance with hospital protocols, failed to transfer him immediately to
another hospital capable of providing the necessary medical care, and failed to stabilize
him before transfer.

The district court granted defendants’ motion for summary judgment. The Fifth Circuit

The appeals court rejected plaintiff’s EMTALA screening claim that defendants provided
Bonilla disparate treatment because hospital protocol called for thrombolytic treatment
within 12 hours of the onset of a myocardial infarction.

The hospital protocol in question applied to the ICU unit, not patients in the ER, the court
found. Moreover, thrombolysis is not a diagnostic tool, but a treatment option and
therefore defendants’ decision not to order thrombolysis would implicate only EMTALA’s
stabilization requirement.

But whether defendants decided to provide Bonilla thrombolytic treatment was
immaterial to EMTALA’s stabilization requirement, given that defendants did not transfer
him until a week after his admission to the ER.

The First Circuit acknowledged other court decisions that defendants’ duty of stabilization
continued even after Bonilla was transferred from the ER to the ICU. Plaintiff’s claim,
however, relied on the disputed issue of whether Bonilla’s myocardial infarction was
ongoing, and therefore an appropriate candidate for thrombolysis, or completed, for
which the treatment was contraindicated.

This disputed issue may be relevant to a medical malpractice action, but would not
normally trigger liability under the EMTALA stabilization requirement, the appeals court

“Even if one could conceive of a hypothetical case in which a defendant’s diagnosis was
so unfounded or groundless that it reasonably might be interpreted as a ruse intended to
conceal its unlawful intent to ‘dump’ a critical patient unable to pay for his healthcare,
that record presents no such case.”

Finally, the appeals court found no positive obligation on hospitals under EMTALA to
transfer a critical patient under particular circumstances to obtain stabilization at another

While a decision not to transfer a critical patient promptly to another hospital for
necessary treatment may trigger medical malpractice liability, it does not constitute an
EMTALA anti-dumping violation, the appeals court said.

Fraticelli-Torres v. Hospital Hermanos, No. 07-2397 (1st Cir. Nov. 13, 2008).

Kentucky Appeals Court Upholds Finding Of Liability Against
Hospital Under EMTALA
A Kentucky appeals court upheld December 5, 2008 a jury’s finding that a hospital that
twice discharged a patient exhibiting symptoms of an emergency medical condition was
liable under the Emergency Medical Treatment and Labor Act (EMTALA).

The appeals court concluded, however, that a new trial on the issue of punitive damages
was warranted, finding the $1.5 million awarded by the jury to the patient’s estate was
clearly excessive.

James Milford Gray arrived at St. Joseph Hospital’s emergency room complaining of
abdominal pain, constipation for four days, nausea, and vomiting.

He was given pain medication and other treatment. Lab tests were ordered, but either
Gray refused to cooperate or they were never conducted. He was discharged but returned
five hours later after vomiting blood.

Lab tests and x-rays were conducted on this subsequent visit and Gray was discharged
later the same day. Gray died shortly thereafter at a family member’s home from a
ruptured peptic ulcer.

Gray’s estate sued the hospital and various treating physicians and hospital personnel for
negligence. The estate also alleged the hospital violated EMTALA by failing to stabilize
Gray before discharge.

A jury returned verdicts in the estate’s favor on both the medical negligence and EMTALA
claims, apportioning fault 15% to the hospital, 60% to various medical personnel
involved in Gray’s treatment, and 25% comparative fault to Gray.

The jury awarded compensatory damages of $25,000, of which the hospital’s share was
$3,750. The jury also assessed punitive damages against the hospital in the amount of
$1.5 million.

The trial court denied the hospital’s motions for a judgment notwithstanding the verdict
or for a new trial on the jury’s findings of liability and the award of compensatory
damages. The court did conclude the punitive damages award was clearly excessive and
ordered a new trial on that issue.

The Kentucky Court of Appeals affirmed.

The appeals court first rejected the hospital’s argument that the estate could not
simultaneously pursue a claim under EMTALA and for medical negligence.

While these claims are separate and have different elements of proof, “a failure to
provide appropriate medical screening and stabilization of an emergency medical
condition may amount to both a violation of EMTALA and medical negligence,” the
appeals court said.

Turning to the merits of the estate’s failure to stabilize claim under EMTALA, the appeals
court agreed with the hospital that its liability did not rest on its negligence for failing to
detect and treat a specific condition.

At the same time, the appeals court found the duty to stabilize under EMTALA did not
require that the hospital had actual knowledge of a specific condition.

Rather, the linchpin of an EMTALA failure to stabilize claim is whether the hospital was
aware the patient had an emergency medical condition and failed to act accordingly.

Based on Gray’s symptoms and other vital signs, the appeals court found a jury could
conclude that, particularly by the second emergency room visit, “the Hospital released
Gray even though the doctors knew his condition was not stable and was likely to

Thus, the trial court properly submitted the issue to the jury and also properly instructed
them on the EMTALA claim.

After denying the hospital’s other arguments regarding alleged errors at trial, the appeals
court addressed the issue of punitive damages, agreeing with the trial court that the
award was clearly excessive.

The appeals court found error in the trial court’s failure to instruct the jury that punitive
damages could not be assessed against the hospital without showing it ratified the
grossly negligent conduct of its employees.

The appeals court acknowledged that, with the proper instructions, a jury could still find
the hospital displayed reckless disregard for the health and safety of others.

But the appeals court also concluded a new trial on punitive damages was warranted
because the amount awarded by the jury was excessive given the lack of evidence that
the hospital engaged in an ongoing course of conduct, the jury apportioned 25% of the
fault to Gray, the large disparity between the award of compensatory damages and
punitive damages, and the substantial difference between the punitive damages award
and the civil penalties authorized under EMTALA (i.e. a maximum of $100,000).

Thomas v. St. Joseph Healthcare, Inc., No. 2007-CA-001192-MR (Ky. Ct. App. Dec. 5,

U.S. Court In Virginia Says United States Did Not Waive
Sovereign Immunity From EMTALA Claims
A former patient of the U.S. Naval Medical Center in Portsmouth could not pursue a claim
under the Emergency Medical Treatment and Labor Act (EMTALA) because the United
States had not waived sovereign immunity from suit, a federal trial court ruled January 7,

Hoffman was pregnant when she presented to the Naval Medical Center with abdominal
pain. According to Hoffman, the hospital discharged her prematurely and her baby
ultimately died as a result.

Plaintiffs Hoffman and her husband sued the United States under the Federal Tort Claims
Act (FTCA) for medical malpractice and under EMTALA.

The United States moved to dismiss the EMTALA claim on the ground it had not waived
sovereign immunity.

The U.S. District Court for the Eastern District of Virginia granted the motion, noting
EMTALA “lacks an ‘unequivocally expressed’ waiver of sovereign immunity.”

The court rejected plaintiffs’ argument that EMTALA violations can be considered torts
grounded in Virginia law, offering an alternate basis for waiver of sovereign immunity
under the FTCA.

Before EMTALA, hospitals had no legal duty to provide patient stabilization or treatment
under traditional state tort law.

Thus, “Congress enacted EMTALA to require that hospitals maintain this practice.”

The court also said plaintiffs could not “tenably equate” a physician’s duty under Virginia
law not to “abandon” their patients with a hospital's duties arising under EMTALA.

Virginia law does not require physicians to treat patients in the first instance; rather, it
establishes a common-law duty to continue treating an existing patient, the court

Accordingly, the court held the United States had sovereign immunity from plaintiffs’
EMTALA claims.

Hoffman v. United States, No. 2:08cv376 (E.D. Va. Jan. 7, 2009).

EMTALA Penalty Upheld By ALJ, OIG Reports
An Administrative Law Judge (ALJ) upheld the Department of Health and Human Services
Office of Inspector General’s (OIG’s) imposition of a $50,000 civil monetary penalty under
the Emergency Medical Treatment and Labor Act (EMTALA) on a hospital, the agency said
February 17, 2009.

OIG assessed the penalty, the maximum allowable, against St. Joseph’s Medical Center
after an 88 year-old man died in its emergency room without having been examined by a
physician after three hours.

The man’s condition deteriorated steadily in the emergency room while his family
repeatedly pleaded unsuccessfully with the emergency room staff for help. Ultimately, the
man went into cardiopulmonary arrest and died without receiving the medical screening
examination or stabilizing treatment required by EMTALA, OIG said.

According to the release, in sustaining the $50,000 penalty, ALJ Steven T. Kessel found
St. Joseph’s failures “shocking” and characterized St. Joseph’s treatment of the patient as
“constituting a complete collapse of the system of care it purported to offer emergency

U.S. Court In Michigan Says Physician May Proceed With
EMTALA Retaliation Claim Against Hospital
A federal court in Michigan denied a hospital summary judgment on a physician’s
retaliation claim under the Emergency Medical Treatment and Labor Act (EMTALA) that it
summarily suspended his privileges after he argued against transferring a patient he
believed was in labor.

The court also found the hospital defendant Lapeer Regional Medical Center (LRMC) and
its chief executive officer and president Barton P. Buxton were not entitled to immunity
under the Health Care Quality Improvement Act (HCQIA) for obstetrician/gynecologist
Gary M. Ritten’s initial suspension.

Immunity also did not extend to the board of trustees’ (board’s) decision to reinstate that
suspension after the Medical Executive Committee (MEC) had determined Ritten’s
privileges should be reinstated, but that his work should be monitored.

The court did conclude, however, that HCQIA immunity applied to a hearing committee’s
decision to suspend Ritten’s privileges following a lengthy review process.

Summary Suspension

Buxton summarily suspended Ritten’s clinical privileges in September 2005 citing
preliminary reports that Ritten had a high rate of vacuum delivery compared to other
physicians and that his patients’ medical records failed to justify use of this technique.

The MEC concluded a few days later that Ritten’s privileges should be reinstated, but that
a preceptor should be appointed to supervise his deliveries.

At Buxton’s urging, the board then called a special meeting and voted to reinstate the

Following an extensive hearing process where Ritten was allowed to present testimony
and expert evidence, a hearing committee voted 3-2 to suspend Ritten permanently.

A few weeks before his initial summary suspension, an incident arose with a patient
identified as Patient “L.” Patient L arrived at LRMC’s emergency department (ED) and was
promptly sent to the hospital’s labor and delivery unit. She was 20 weeks pregnant and
experiencing vaginal bleeding and light cramping.

Ritten saw Patient L and concluded she was in labor and that the proper course was to
evacuate the uterus since the baby was not viable at 20 weeks. Another physician,
however, disagreed and concluded Patient L was not in labor.

Buxton suggested transferring Patient L to another facility. According to Ritten, Buxton
threatened Ritten that he would lose his job unless he transferred the patient. Ritten said
he protested the transfer, because he believed she was not stable and could deliver at
any time. Before the transfer was arranged, Patient L delivered her baby.

EMTALA Retaliation Claim

In his complaint against LRMC and its parent company, Ritten alleged his staff privileges
were suspended in retaliation for his refusal to transfer a patient with an emergency
condition that had not been stabilized in violation of EMTALA, 42 U.S.C. § 1395dd(i).

The U.S. District Court for the Eastern District of Michigan refused to grant summary
judgment to LRMC on Ritten’s EMTALA claim.

Although Patient L was admitted to the hospital’s labor and delivery unit shortly after she
presented to the ED, this did not end the hospital’s EMTALA obligations, the court said.

In so holding, the court cited “clarifying policies” issued by the Department of Health and
Human Services that caution against treating pregnant women, who are routinely sent
from the ED to the labor and delivery unit for admission, as inpatients.

The question of whether Patient L in fact had an emergency medical condition, as Ritten
contended, or was not in labor, as defendants argued, was irrelevant to the EMTALA
retaliation claim, the court said.

Moreover, “[a] hospital is not free to discount a physician’s reasonable evaluation and
then retaliate against the physician with impunity, on the ground that it did not accept or
agree with the physician’s stated finding of an emergency medical condition,” the court

Direct Evidence of Retaliation

The court also cited direct evidence that could support an inference of retaliation—i.e.
Ritten’s allegations that Buxton threatened to fire him unless he transferred Patient L.

The court found significant the closeness in time (three weeks) between the incident and
the point when Buxton summarily suspended Ritten. According to the court, taking the
allegations as true, “no inferences would be required to conclude that Plaintiff’s refusal to
transfer the patient ‘was a motivating factor’ in Buxton’s decision to suspend his

The court also rejected defendants’ argument that Ritten’s direct evidence of retaliatory
motive only extended to Buxton’s decision to suspend Ritten’s privileges, saying a

reasonable jury could conclude Buxton influenced the board’s subsequent decision to
reinstate the suspension.

The final hearing process took over a year and defendants offered no authority that such
an extended suspension of privileges would not qualify as a “penal[ty]” or “adverse
action” under EMTALA’s anti-retaliation provision.

HCQIA Immunity

The court held Buxton’s initial decision to suspend Ritten’s privileges was not entitled to
HCQIA Immunity.

The court noted evidence that Buxton’s decision was motivated by Ritten’s refusal to
transfer Patient L and was imposed before a review of Ritten’s patient files had been

The court likewise found the board’s decision to reinstate the suspension of Ritten’s
privileges was not protected by HCQIA. While the factual record may have been
somewhat more developed at that time, the court said the board still failed to conduct
any further inquiry into potential explanations for Ritten’s higher rate of vacuum

Nor did the board describe its rationale for rejecting the MEC’s recommendation that a
preceptor be appointed to monitor Ritten’s cases. The court also cited as significant the
lack of evidence that Ritten posed a substantial risk to patients.

Although a “close call,” the court concluded the hearing committee’s decision to suspend
Ritten’s privileges was entitled to HCQIA immunity.

Specifically, the court said, Ritten had a chance to present facts and witnesses and argue
his side.

The court emphasized that whether Ritten did in fact provide deficient care was
irrelevant; rather, the key inquiry was whether an objective view of the record disclosed
a sufficient basis for the committee’s decision.

Based on its ruling regarding HCQIA immunity, the court dismissed some of Ritten’s state
law claims regarding tortious interference and defamation related to the hearing
committee’s decision.

The court said Ritten could still pursue equitable relief—i.e. reinstatement of his
privileges—in connection with his EMTALA retaliation claim, but damages would be limited
to any harm suffered as a result of the summary suspension of his staff privileges, first
by Buxton and then by the board.

Ritten v. Lapeer Reg’l Med. Ctr., No. 07-10265 (N.D. Mich. Mar. 11, 2009).

Sixth Circuit Says Third-Party May Sue Under EMTALA
The Sixth Circuit held April 6, 2009 that a non-patient third-party has standing under the
Emergency Medical Treatment and Labor Act (EMTALA) to sue a hospital for alleged

According to the appeals court, EMTALA's civil enforcement provision contains broad
language regarding who may bring a claim, and nothing in the statute limits its reach to
patients treated at the hospital.

Other circuits have held that the relatives of a patient who suffers an EMTALA harm
cannot sue a hospital in their individual capacities, the appeals court noted; however,
here the plaintiff was the estate of a person who—while not the patient—suffered a direct
personal harm caused by the alleged EMTALA violation.

Marie Moses-Irons on December 13, 2002, took her husband Howard to the emergency
room at Providence Hospital and Medical Centers, Inc. (hospital) because he was
suffering from severe headaches, muscle soreness, high blood pressure, vomiting, slurred
speech, disorientation, hallucinations, and delusions.

Howard was admitted and was examined by several doctors. Dr. Paul Lessem, a
psychiatrist, determined that Howard was not “medically stable from a psychiatric
standpoint,” and decided that Howard should be transferred to the hospital’s psychiatric

However, Howard was never transferred to the psychiatric unit and was instead released
on December 19. The next day, he murdered Moses-Irons.

Plaintiff Johnella Richmond Moses filed suit on behalf of the estate of Moses-Irons against
the hospital and Lessem (defendants) alleging violations of EMTALA and various
negligence claims.

Defendants filed a motion to dismiss the complaint, which the district court granted, and
the plaintiff appealed.

The appeals court first addressed whether, as a non-patient, plaintiff had standing under

The appeals court said cases holding the relatives of a patient who suffers harm could
not sue a hospital in their individual capacities were not on point, since in this case the
action was brought on behalf of the estate of a person (Moses-Irons) who had personally
suffered a harm caused by the alleged EMTALA violation.

The plain language of EMTALA's civil enforcement provision is broad with respect to who
may bring a claim, the appeals court noted.

Under EMTALA “any individual who suffers personal harm as a direct result” of a
hospital’s EMTALA violation may sue.

In arguing that only harmed patients may sue, defendants contended the phrase “any
individual” in Section 1395dd(d)(2)(A) must be read in the context of other parts of the
statute that refer to an “individual” who “comes to the hospital.”

The appeals court disagreed, however, finding Congress could have included such
language in the enforcement provision, but did not.

The appeals court looked at the legislative history, but found none directly addressing the
instant issue. Accordingly, the appeals court concluded ”the civil enforcement provision,
read in the context of the statute as a whole, plainly does not limit its reach to the
patients treated at the hospital.”

Turning next to plaintiff’s failure to stabilize claim, the appeals court found the act of
admitting Howard did not end the hospital’s EMTALA obligations.

“EMTALA requires a hospital to treat a patient with an emergency condition in such a way
that, upon the patient’s release, no further deterioration of the condition is likely,” the
appeals court explained.

The appeals court went on to find that a Centers for Medicare and Medicaid Services
rule—42 C.F.R. § 489.24(d)(2)(i)—which effectively ends a hospital’s obligations under
EMTALA after a patient is admitted, “appears contrary to EMTALA’s plain language.”

Giving no deference to the rule, the appeals court instead emphasized that under EMTALA
a “hospital may not release a patient with an emergency medical condition without first
determining that the patient has actually stabilized, even if the hospital properly admitted
the patient.”

The appeals court next held the district court erred in granting summary judgment on the
basis that there was no emergency medical condition, finding “that whether Howard had
an emergency medical condition that the hospital recognized upon screening him is an
issue of fact that the court should have left for a jury to decide.”

The appeals court noted that a mental health emergency could qualify as an “emergency
medical condition” under the plain language of the statute and evidence presented by
plaintiff established an issue of fact on this point.

The appeals court also rejected defendants’ argument that they believed Howard’s
condition to be stable when he was discharged, finding issues of fact existed on this point
as well.

Lastly, the appeals court affirmed the district court’s grant of summary judgment to
Lessem, saying EMTALA does not provide a right of action against individual physicians.

Moses v. Providence Hosp. and Med. Ctrs., Inc., No. 07-2111 (6th Cir. Apr. 6, 2009).

Plaintiff Entitled To View Medical Records Of Similarly Situated
Patients For EMTALA Claims, Federal Court In New Jersey
The U.S. District Court for the District of New Jersey found April 15, 2009 that a hospital
must produce certain medical records of similarly situated patients sought by a plaintiff in
an Emergency Medical Treatment and Labor Act (EMTALA) suit.

The court agreed with the plaintiff in the case that the records were necessary to prove
she received an inadequate medical screening compared with other patients with similar

Plaintiff Grisselle Gonzalez went to the emergency room at defendant South Jersey
Healthcare Regional Medical Center (hospital) for chest pain and shortness of breath.
According to plaintiff, she was examined by defendant Ilmia Bono Choudhary, who
diagnosed Gonzalez with extra-pyramidal symptoms and dystonia and discharged her.

Two days later, plaintiff arrived again at the emergency room and suffered cardiac arrest
while waiting to be seen.

Plaintiff sued the hospital and Choudhary arguing the hospital violated EMTALA by failing
to give her an appropriate medical screening examination during her first hospital visit.

During discovery, plaintiff sought redacted records of other patients who presented at the
same hospital with a chief complaint of chest pain within a two-week period of her
February 1 visit.

Because the hospital at the time of plaintiff’s visit purportedly had no written policies or
procedures for the treatment of a patient who presented to the emergency department
with a chief complaint of chest pain, plaintiff maintained the only means of determining
the hospital's screening policies or procedures was to review contemporaneous medical
records of other patients who presented to the emergency department with similar

The court noted that the “key requirement” of a hospital's duty under EMTALA “is that a
hospital apply its standard of screening uniformly to all emergency room patients,
regardless of whether they are insured or can pay.” Davis v. Twp. of Paulsboro, 424 F.
Supp. 2d 773, 779 (D.N.J. 2006).

The court held plaintiff's discovery request seeking medical records of other patients
presenting at the emergency department with similar injuries and symptoms was
relevant to her EMTALA claim.

The court found no merit in the hospital’s argument that the medical records were not
relevant because plaintiff was asserting a claim for "faulty medical screening" rather than
an "inadequate medical screening."

“[T]o the extent [the hospital] screens patients presenting in the emergency department
with a chief complaint of chest pain by conducting certain cardiac tests, the failure to
perform such tests on Plaintiff may support both a malpractice claim and a disparate
screening claim under EMTALA,” the court held.

The court also rejected the hospital's argument that the medical records of other patients
were not relevant because no two patients present with identical symptoms.

Instead, the court held that under EMTALA a plaintiff is not required to identify patients
with identical symptoms; rather the statute says hospitals must treat patients with
“similar symptoms” in a standard manner.

Gonzalez v. Choudhary, No. 08-0076-JHR-AMD (D.N.J. Apr. 15, 2009).

U.S. Supreme Court Says Conflicts Issue Must Be Weighed As A
Factor In Reviewing Benefits Denial
A conflict of interest arises when a professional insurance company serves the dual role
of administrator and insurer of an employee benefit plan governed by the Employee
Retirement Income Security Act (ERISA) that a reviewing court should consider in
deciding whether the plan administrator has abused its discretion in denying benefits, a
divided U.S. Supreme Court ruled June 19, 2008.

The majority opinion, written by Justice Breyer, said the significance the conflict will play
in the review of the benefits denial depends on the facts of the case.

The instant dispute arose after Metropolitan Life Insurance Company (MetLife) denied
disability benefits to Wanda Glenn, who has a heart disorder, under her Sears, Roebuck &
Company’s long term disability plan. MetLife is both the administrator and insurer of the

As the plan administrator, MetLife has discretionary authority to determine the validity of
an employee’s benefits claim and, as insurer, is responsible for paying those claims.

Glenn eventually sought judicial review of MetLife’s denial of benefits, and the district
court refused to grant her relief. But the Sixth Circuit set aside the denial of benefits,
relying on a number of factors, including the “conflict of interest” arising out of the fact
that MetLife was “authorized both to decide whether an employee is eligible for benefits
and to pay those benefits.”

Citing its decision in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, in which the
Court addressed “the appropriate standard of judicial review of benefit determinations by
fiduciaries or plan administrators” under ERISA, the majority concluded that a conflict,
though "less clear" than in the context of a self-insuring employer, nonetheless exists
when a professional insurance company acts as the plan administrator and insurer.

MetLife argued that market forces provide a greater incentive for commercial insurers, as
opposed to self-insuring employers, to provide accurate claims processing. But Justice
Breyer wrote that “ERISA imposes higher-than-marketplace quality standards on

Moreover, “a legal rule that treats insurance company administrators and employers alike
in respect to the existence of a conflict can nonetheless take account of the
circumstances to which MetLife points so far as it treats those, or similar, circumstances
as diminishing the significance or severity of the conflict in an individual case.”

According to the Court majority, the conflict should be weighed as a “factor in
determining whether there is an abuse of discretion.” This does not imply a change in the
standard of review from deferential to de novo, the opinion emphasized.

Thus, the significance of the conflict of interest factor will depend on the circumstances of
the particular case, the majority concluded. Finding this was the framework employed by
the Sixth Circuit, the Court majority affirmed the decision below.

In a concurring opinion, Chief Justice Roberts agreed that a third-party insurer’s dual role
as a claims administrator and plan funder gives rise to a conflict.

Roberts parted ways, however, with the majority’s “indeterminate” approach to how such
a conflict should matter, saying the majority's decision would “increase the level of
scrutiny in every case in which there is a conflict—that is in many if not most ERISA
cases—thereby undermining the deference owed to plan administrators when the plan
vests discretion in them."

Instead, Roberts said, the conflicts issue should only be a factor where evidence exists
that the benefits denial was motivate or affected by the administrator’s conflict. Although
he saw no evidence of this motivation here, Roberts nonetheless affirmed the Sixth
Circuit's decision, finding the appeals court was justified in finding an abuse of discretion
on the facts of the case regardless of whether a conflict existed.

Justice Kennedy concurred with the majority’s framework for evaluating the conflicts
issue, but dissented as to the result, saying the case should be remanded to the Sixth

Circuit to give MetLife an opportunity to defend its decision under the standards
articulated by the Court.

A dissenting opinion written by Justice Scalia, and joined by Justice Thomas, rejected the
majority’s so-called “totality-of-the-circumstances” test for weighing the significance of
the conflict. “This makes each case unique, and hence the outcome of each case
unpredictable. . . .”

According to the dissent, under the law of trusts, “a fiduciary with a conflict does not
abuse its discretion unless the conflict actually and improperly motivates the decision.”
The dissent found no evidence of that in the instant case and therefore would remand to
the Sixth Circuit for further examination as to the reasonableness of the denial.

Metropolitan Life Ins. Co. v. Glenn, No. 06-923 (U.S. June 19, 2008).

Seventh Circuit Finds Provider’s Claims Not Preempted By ERISA
The Seventh Circuit held July 31, 2008 that the Employee Retirement Income Security
Act (ERISA) did not preempt a healthcare provider’s action for negligent
misrepresentation against a health plan. In so holding, the appeals court found the
provider’s claims did not arise under the plan or its terms, but rather arose from duties
imposed under state law.

Plaintiff healthcare provider Franciscan Skemp Healthcare, Inc. (FSH) treated Sherry
Romine, a participant in Central States Joint Board Health and Welfare Trust Fund, an
employee benefits plan.

Before providing treatment, FSH called Central States to confirm coverage and was told
the relevant services were covered.

After the treatment was provided, FSH billed Central States, but the claim was denied
because Romine lost her benefits before her admission to FSH for failing to pay COBRA

FSH sued Central States in state court alleging claims of negligent misrepresentation and
estoppel. Central States removed the case under ERISA.

The district court concluded that ERISA completely preempted the state law claims, thus,
establishing exclusive federal jurisdiction. The court then dismissed FSH’s claims for
failure to state a claim.

On appeal, the Seventh Circuit noted the lower court found that FSH could have brought
its state law claims of negligent misrepresentation and estoppel under ERISA §
502(a)(1)(B) because FSH took an assignment of benefits from Romine.

However, the appeals court said, “[w]hat the district court and Central States too easily
overlook” is that FSH is bringing these claims “not as Romine’s assignee, but entirely in
its own right.”

The claims arise not from the plan or its terms, but from the alleged oral representations
Central States made, the appeals court held.

In fact, the appeals court continued, FSH does not dispute Central States’ decision to
deny Romine coverage and acknowledges that Romine is not entitled to benefits.

“It would be odd indeed, then, to conclude that Franciscan Skemp is standing in Romine’s
shoes as a beneficiary seeking benefits when Franciscan Skemp acknowledges that
Romine is not actually entitled to any benefits,” the appeals court said.

Accordingly, the appeals court concluded that FSH’s claims were not preempted because
they could not have been brought under ERISA § 502(a)(1)(B).

The appeals court also found that FSH’s claims did not meet the second test in the
seminal Aetna Health Inc. v. Davila, 542 U.S. 200, 209 (2004) preemption test—whether
an independent legal duty is implicated by the defendant’s actions.

Here, the “claims of negligent misrepresentation and estoppel derive from duties imposed
apart from ERISA and/or the plan terms,” the appeals court said.

Thus, the appeals court returned the case to the district court to enter an order of
remand to state court.

Franciscan Skemp Healthcare Inc. v. Central States Joint Bd. Health and Welfare Trust
Fund, No. 07-3456 (7th Cir. July 31, 2008).

Fifth Circuit Holds ERISA Completely Preempts Pharmacy’s
Claim Under Texas AWP Law
The Employee Retirement Income Security Act (ERISA) completely preempts a
pharmacy’s action under the Texas Any Willing Provider (AWP) law because the claims
essentially were for benefits due under the plan and therefore were within the scope of
ERISA’s civil enforcement provision, the Fifth Circuit ruled August 13, 2008 in a
consolidated action of two cases with similar facts.

The two cases involved Quality Infusion Care, Inc. (QIC), which provided prescription
home infusion therapy to Eric Carstens and Mary Williby, both of whom were participants
in the ERISA-governed Humana Health Plan of Texas, Inc. (Humana).

QIC provided the prescribed drugs to Carstens at the cost of $8,114.48 and to Williby at
the cost of $31,921.59. In both cases, Humana refused to pay the amounts submitted by
QIC, which had claimed it had been assigned Carstens’ and Williby’s respective rights
under the plan. Humana cited QIC’s status as a non-network provider as the reason for
the denials.

QIC sued Humana in state court asserting a discrimination claim under the Texas AWP
law, which provides that a healthcare plan may not prohibit a pharmacy from
participating “as a contract provider under the . . . plan” if it otherwise meets “all terms
and requirements . . . under the policy or plan.”

Humana removed the action to federal court citing ERISA preemption and moved to
dismiss. The district court in both cases refused to remand the actions, finding complete
preemption under the U.S. Supreme Court’s decision in Aetna Health Inc. v. Davila, 542
U.S. 200 (2004), and granted Humana’s motions to dismiss.

On appeal, the Fifth Circuit affirmed.

QIC argued that its AWP claims were independent of, and did not duplicate, ERISA’s civil
enforcement provision, § 502(a), and therefore were subject only to conflict (not
complete) preemption under § 514.

Citing Kentucky Ass’n of Health Plans, Inc. v. Miller, 538 U.S. 329 (2003), QIC went on to
argue its claims were saved from conflict preemption as state laws regulating insurance.

Humana asserted, however, that QIC’s AWP claims depended on interpretation of an
ERISA plan and therefore were subject to complete preemption (with no saving clause)
under Davila.

The appeals court agreed with Humana, finding complete, not conflict, preemption
applied. “In essence, QIC’s AWP claims are for benefits under the Plan and, thus, are
completely preempted and subject to removal,” the appeals court said.

The Fifth Circuit also rejected QIC’s argument that it lacked standing to bring a claim
under ERISA as a healthcare provider. Although not statutorily designated as an ERISA
beneficiary, QIC nonetheless could obtain standing to sue derivatively through an
assignment of benefits, which it asserted it had in both cases.

The appeals court distinguished cases cited by QIC that found similar AWP statutes acted
as independent sources of rights outside of the plan at issue. The disputes in those cases,
the appeals court said, centered on the amount or level of payment that depended on
entirely separate provider agreements, not the right to payment, which depended on
patients’ benefit assignments.

“Here, the claims not only involve participants and assignments, they also rely on Plan
‘terms and requirements,’” the appeals court observed.

Finally, the appeals acknowledged that the Miller decision cited by QIC did find a similar
AWP statute in Kentucky was saved from preemption as a state law regulating insurance.
But the issue in that case, the Fifth Circuit emphasized, involved conflict preemption, not
complete preemption where ERISA’s “saving clause” does not apply.

Quality Infusion Care Inc. v. Humana Health Plan of Tex. Inc., Nos. 07-20703 and 07-
20887 (5th Cir. Aug. 13, 2008).

Ninth Circuit Finds No ERISA Preemption Of San Francisco
Ordinance Mandating Employer Healthcare Expenditures
In a closely watched decision, the Ninth Circuit ruled September 30, 2008 that the
Employee Retirement Income Security Act (ERISA) does not preempt a San Francisco
Ordinance setting new healthcare spending mandates for employers.

Reversing a December 2007 lower court decision, a three-judge panel of the Ninth Circuit
held the Ordinance's employer spending mandates did not establish an ERISA plan, nor
did they have an impermissible “connection with” employers’ ERISA plans or make an
impermissible “reference to” such plans.

“There may be better ways to provide health care than to require employers in the City of
San Francisco to foot the bill. But our task is a narrow one, and it is beyond our province
to evaluate the wisdom of the Ordinance now before us,” the Ninth Circuit said.

The appeals court rejected the suggestion that by upholding the Ordinance it was
creating a split with the Fourth Circuit, which found ERISA preempted a similar Maryland
law. See Retail Industry Leaders Ass’n v. Fielder, 475 F.3d 180 (2007).

Even assuming “the panel majority in Fielder was correct,” the San Francisco Ordinance is
valid because it “offers employers a meaningful alternative that allows them to preserve
the existing structure of their ERISA plans,” the Ninth Circuit said.

San Francisco City Attorney Dennis Herrera praised the appeals court's ruling. "Unlike a
more sweeping tax or fee, 'Healthy San Francisco' gives the vast majority of eligible
employers credit for the health care coverage they already provide to their workers. At
the same time, it gives those employers who don't offer health coverage the flexibility to
either add the benefit or pay a reasonable amount to enable the City to provide
coverage," Herrera said.

Employer Spending Mandates

The San Francisco Health Care Security Ordinance, passed in 2006, requires medium and
large employers (those with over 20 employees) and nonprofits with over 50 employees
to make certain levels of healthcare expenditures for individuals employed for more than
90 days who work over 10 hours per week.

Qualifying healthcare expenditures include contributions to health savings accounts,
direct reimbursement to employees for healthcare expenses, payments to third parties
for healthcare services, costs incurred in the direct delivery of healthcare services, or
payments to the City “to be used on behalf of covered employees.”

Covered employers would have to maintain “accurate records of health care
expenditures” and “proof of such expenditures” and allow “reasonable access” by City

The Ordinance, which went into effect January 1, 2008, also establishes a City-
administered Health Access Program (HAP) for uninsured residents funded through
contributions from private employers, individuals, and the City.

ERISA Challenge

Golden Gate Restaurant Association (GGRA), representing the interests of the restaurant
industry, sought declaratory and injunctive relief that ERISA preempted the Ordinance’s
spending requirement.

The U.S. District Court for the Northern District of California granted summary judgment
in GGRA's favor, finding ERISA preempted the ordinance’s healthcare expenditure
requirements because they had an impermissible "connection with" and made "unlawful
reference to" employee welfare benefit plans.

A three-judge panel of the Ninth Circuit in a January 9, 2008 order agreed to stay the
federal trial court’s decision, allowing the Ordinance to go into effect pending the appeals
court’s decision on the merits.

GGRA subsequently filed an application with Supreme Court Justice Anthony Kennedy to
vacate the Ninth Circuit stay. Kennedy denied the application.

No ERISA Preemption

In its latest decision, the appeals court emphasized that the Ordinance did not require
employers to establish or alter existing ERISA plans. Rather, employers had the option to
make payments directly to the City to satisfy their obligations under the Ordinance.

The Ninth Circuit also said the Ordinance did not focus on healthcare benefits an
employer provides its employees. “The Ordinance does not look beyond the dollar
amount spent, and it does not evaluate benefits derived from those dollars.”

The appeals court went on to address specific arguments made by GGRA and the
Department of Labor (DOL), which in April 2008 submitted an amicus curiae brief arguing
the lower court correctly found ERISA preempted the Ordinance’s spending mandates.

First, the appeals court held the City-payment option did not create an ERISA plan.
According to the appeals court, an employer’s administrative responsibilities under the
Ordinance to make the required payments for covered employees and to retain adequate
records did not make the City-payment option an ERISA plan.

“Many federal, state and local laws, such as income tax withholding, social security, and
minimum wage laws, impose similar administrative obligations on employers; yet none of
these obligations constitutes an ERISA plan,” the appeals court said.

Moreover, the Ninth Circuit noted, the HAP is funded mostly with taxpayer dollars and
“will continue to exist, whether or not any covered employer makes a payment to the
City under the Ordinance.”

In addition, employers have no control over eligibility or the kind and level of benefits
provided by the HAP. “In short, the City, rather than the employer, establishes and
maintains the HAP, and the City is free to change the kind and level of benefits as it sees

Next, the appeals court rejected GGRA’s and DOL’s argument that Section 514(a) of
ERISA preempted the Ordinance because it “relates to” employers’ ERISA plans.

The appeals court again stressed that the Ordinance did not require any employer to
adopt an ERISA plan or other health plan, nor did it require any employer to provide
specific benefits through an existing ERISA plan or other health plan.

"Any employer covered by the Ordinance may fully discharge its expenditure obligations
by making the required level of employee health care expenditures, whether those
expenditures are made in whole or in part to an ERISA plan, or in whole or in part to the
City. The Ordinance thus preserves ERISA’s 'uniform regulatory regime,'" the Ninth
Circuit said.

Nor did the Ordinance have an impermissible “reference to” ERISA plans, as the district
court found.

In this regard, the appeals court distinguished between employer obligations that are
measured by reference to the level of benefits provided by an ERISA plan to employees,
and those, as with the Ordinance, that are measured by reference to the payments
provided by the employer to an ERISA plan or to another entity such as the City.

Finally, the appeals court disputed the contention that upholding the Ordinance was
inconsistent with the Fourth Circuit’s decision in Fielder. According to the Ninth Circuit,
the Fielder court based its decision on the fact that the rational choice for Wal-Mart, the
only employer affected by the Maryland law, was to structure its ERISA healthcare benefit
plans so as to meet the minimum spending threshold.

“In contrast to the Maryland law, the San Francisco Ordinance provides tangible benefits
to employees when their employers choose to pay the City rather than to establish or
alter ERISA plans,” the Ninth Circuit noted.

“Unlike the Maryland law, the San Francisco Ordinance provides employers with a
legitimate alternative to establishing or altering ERISA plans,” the appeals court said.

En Banc Review Denied

The Ninth Circuit rejected March 9, 2008 GGRA’s petition for rehearing en banc of the
panel decision.

In its petition, GGRA asked the full court to review the panel decision based on two
issues: the national importance of the case and the conflict with previous rulings in the
Fourth and Ninth Circuits and the U.S. Supreme Court.

Eight judges from the Ninth Circuit dissented from the majority’s decision not to grant en
banc review.

In his dissenting opinion, Circuit Judge Smith argued that the case creates a circuit split
with the Fourth Circuit’s decision in Fielder.

The dissent disputed the panel’s conclusion that the Ordinance was distinguishable from
the Maryland law at issue in Fielder because the Ordinance creates a municipally funded
health alternative as opposed to a tax on employers that was not earmarked towards
their employees’ insurance.

“Covered employers under San Francisco’s Ordinance must coordinate their non-ERISA
payments with their ERISA plans in the very manner the Fielder court deemed
impermissible,” the dissent said.

According to the dissent, the decision also conflicts with Supreme Court precedent
establishing ERISA preemption guidelines and, “most importantly, flouts the mandate of
national uniformity in the area of employer-provided healthcare that underlies the
enactment of ERISA.”

The dissent predicted that as a result of the decision “similar laws will become
commonplace . . . with significant adverse consequences to employers and employees

Circuit Judge Fletcher, concurring in the denial of rehearing en banc, disputed the
dissent's contention that the panel’s decision created a circuit conflict with Fielder.

According to the concurring opinion, the San Francisco Ordinance differs sharply from the
Maryland law in Fielder because the former offers employers a “meaningful choice” rather
than “imposing a de facto obligation” to establish or alter an ERISA plan.

Judge Fletcher also refuted the dissent’s opinion that allowing the Ordinance to stand
would undermine the national uniformity envisioned by ERISA.

“Nothing in the Ordinance requires the employer to establish an ERISA plan or alter an
existing ERISA plan, and nothing in the Ordinance interferes in any way with the
uniformity of ERISA regulations,” the concurring opinion said.

U.S. Supreme Court Justice Kennedy denied March 30, 2008 GGRA’s request to suspend
the Ordinance while it seeks Supreme Court review.

Golden Gate Restaurant Ass’n v. City and County of San Francisco, No. 07-17370 (9th
Cir. Sept. 30, 2008), reh’g en banc denied (9th Cir. Mar. 9, 2009).

Sixth Circuit Says Insurer Should Have Been Aware Of Potential
Fraud Concerning Preexisting Condition
An insurer’s action involving an insured’s alleged failure to disclose a preexisting
condition on her application for health coverage was barred by the limitations period in
the applicable group health insurance contract, the Sixth Circuit held.

According to the appeals court, the action was filed more than three years after the
insurer should have realized it was paying claims for the preexisting condition. Thus, the
action was barred since the contract set forth a three-year limitations period for such

On April 14, 2005, Medical Mutual of Ohio (MMO) sued Loan A. Tran and Khanh B. Luu for
failing to disclose that their dependent son had a preexisting medical condition,
hemophilia, on their application for health insurance coverage.

MMO also sued Tran’s employer, k. Amalia Enterprises Inc., and its Chief Financial
Officer, which contracted with MMO to provide group health insurance to the company’s

The group policy at issue began in November 2001 and ended in 2004. According to
information provided in the opinion, MMO began paying claims related to Tran’s son’s
hemophilia in February 2002.

MMO alleged defendants breached the insurance contract, made negligent
misrepresentations, and engaged in fraudulent behavior. MMO sought compensatory
damages for these claims totaling in excess of $500,000 and partial rescission of the

The district court granted summary judgment in defendants’ favor finding MMO’s claims
were barred by the contractual limitations provision.

Affirming, the Sixth Circuit first concluded that it had subject matter jurisdiction because
MMO asserted a claim under the Employee Retirement Income Security Act’s (ERISA) civil
enforcement provision for partial rescission of the contract.

While assuming, without deciding, that MMO’s partial rescission claim stated an
“equitable” claim cognizable under ERISA, the appeals court nonetheless held the claim
was barred by the limitations provision of the contract between MMO and k. Amalia.

The contract provided a somewhat ambiguous limitations period of two or three years
seemingly depending on whether a dispute involved a “legal” action or equitable claims.

Regardless of which limitations period applied, the appeals court found the ERISA claim
was barred because MMO brought suit more than three years after it should have
discovered the fraud—i.e. in February 2002 when it first started paying claims related to
Tran’s son’s hemophilia.

“MMO had access to information more than three years before it filed suit that, in the
exercise of due diligence, should have allowed it to discover that Hiep Luu had a
preexisting condition,” the appeals court said.

The appeals court noted that within a few months of the contract’s formation, on
February 1, 2002, MMO had paid over $8,000 worth of hemophilia treatments for Tran’s

In the appeals court’s view, MMO, as a “sophisticated insurance company,” had
information in-hand that put it on notice of potential fraud long before it filed suit.

The appeals court applied a similar analysis under Ohio law to MMO’s remaining claims
for fraud, negligent misrepresentation, breach of contract, and unjust enrichment.

Medical Mut. of Ohio v. k. Amalia Enters., No. 07-4422 (6th Cir. Dec. 2, 2008).

Sixth Circuit Holds Michigan Regulation Banning “Discretionary
Clauses” Saved From ERISA Preemption
The Employee Retirement Income Security Act (ERISA) does not preempt Michigan
regulations that prohibit insurers from issuing, delivering, or advertising insurance
policies that contain “discretionary clauses,” the Sixth Circuit held March 18, 2009.

Affirming a lower court decision, the appeals court found the rules issued by the Michigan
Office of Financial and Insurance Services (OFIS) regulated insurance and therefore were
saved from preemption under ERISA, 29 U.S.C. § 1144(b)(2)(A).

The rules at issue ban discretionary clauses in insurance contracts and policies. These
clauses provide that courts will give deference to a plan administrator’s decision to award
or deny benefits or interpretation of plan terms in any court proceeding challenging such
decisions or interpretations.

Several insurance industry groups—the American Council of Life Insures, America’s
Health Insurance Plans, and Life Insurance Association of Michigan—sued the OFIS
Commissioner Ken Ross (defendant), arguing ERISA preempted the rules, which took
effect June 1, 2007.

The district court granted summary judgment in defendant’s favor.

Applying the two-prong test set forth by the U.S. Supreme Court in Kentucky Association
of Health Plans v. Miller, 538 U.S. 329 (2003), the appeals court found the Michigan
rules fell under the ERISA saving clause because they were directed toward entities
engaged in insurance and substantially affected the risk-pooling arrangement between
the insurer and the insureds.

As to the first prong of the Miller test, the appeals court noted the rules regulated only
those entities in the insurance business, even though they may have some collateral
effects on fiduciaries who administer health plans.

The appeals court rejected the insurance industry’s argument that the Michigan rules
failed the second prong of the Miller analysis because they only had an effect after risk
had been transferred. The Supreme Court has never ruled the Miller test depends on the
timing of when a law substantially affects the risk-pooling arrangement, the appeals court

Here, Michigan’s rules had a substantial effect on the insured-insurer relationship because
the rules directly control the terms of insurance contracts by prohibiting the inclusion of
discretionary clauses and they prevent insurers from investing the plan administrator
with unfettered discretionary authority to determine benefit eligibility or to construe
ambiguous plan terms, the appeals court said.

The appeals court also rejected the insurance industry’s argument that the Michigan rules
could not be saved from ERISA preemption because they conflicted with ERISA’s civil
enforcement provision, 29 U.S.C. § 1132(a)(1)(B).

The Michigan rules do no implicate ERISA’s civil enforcement provision; they do not
authorize any form of relief in state courts and they do not grant a plan participant the
ability to recover benefits due under the plan or enforce his rights, the appeals court

Finally, the Eighth Circuit rejected the insurance industry's contention that the regulations
conflicted with ERISA’s policy of ensuring a set of uniform rules for adjudicating cases
under the statute.

The statute says nothing about the standard of review in cases brought under its civil
enforcement provisions, the appeals court observed.

Moreover, in Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355 (2002), the Supreme
Court held a statute mandating that benefit denials are subject to de novo review did not
conflict with ERISA.

The appeals court also cited the Court’s more recent decision in Metropolitan life
Insurance Co. v. Glenn, 128 S.Ct. 2343 (2008), which found that courts reviewing a
benefits decision by an insurer with discretion over assessing and paying benefits may
consider that conflict as a factor in deciding whether the plan administrator’s decision
amounted to an abuse of discretion.

Given the Court’s holding in Glen, “it is difficult to understand why a State should not be
allowed to eliminate the potential for such a conflict of interest by prohibiting
discretionary clauses in the first place,” the appeals court said.

American Council of Life Insurers v. Ross, No. 08-1406 (6th Cir. Mar. 18, 2009).

U.S. Court In D.C. Strikes Portion Of Law Regulating PBMs
Finding Law Preempted By ERISA
In a decision hailed by the Pharmaceutical Care Management Association (PCMA) as “a
clear victory for consumers and payers,” the U.S. District Court for the District of
Columbia found March 19, 2009 that the Employee Retirement Income Security Act
(ERISA) preempted a D.C. law attempting to regulate pharmaceutical benefit
management companies (PBMs).

After a long procedural history, the case was taken up for the second time by the court,
which found the Access Rx Act of 2004 “impermissibly intrudes upon a field exclusively
reserved for federal regulation.”

Title II of the Act, the portion at issue here, regulates PBMs by imposing fiduciary duties
on them in relation to "covered entities," as well as by requiring disclosure of certain
financial information.

According to PCMA President and CEO Mark Merritt, the “fiduciary-disclosure requirement
would have been a recipe for higher drug prices and is exactly what consumers don’t
need during these tough economic times.”

Merritt noted in a March 20, 2009 statement that “more than 30 states have considered
and ultimately rejected similar legislation because it would lead to increased costs
without any benefit for consumers.”

The case began when PCMA sued the District in 2004, seeking to enjoin enforcement of
the Act.

In 2007, the court dismissed PCMA’s challenge, finding the First Circuit’s decision in PCMA
v. Rowe, 429 F.3d 294 (1st Cir. 2005), which upheld a similar statute in Maine, barred by
collateral estoppel PCMA’s action.

On appeal, the D.C. Circuit reversed the dismissal and remanded to the court for further

Both parties moved for summary judgment. PCMA argued ERISA preempted Title II of the
Act and the District countered that the law did not relate to ERISA.

In finding the law preempted by ERISA, the court noted that PBMs, among other things,
process prescription drug claims on behalf of "insurance companies, health maintenance
organizations and private and public health plans and programs," including ERISA plans.

“By managing the relationship between an ERISA plan and a third-party service provider
instrumental to the administration of the plan, the defendants, through the Act,
improperly inject state regulation into an area exclusively controlled by ERISA,” the court

The court found additional support for its conclusion in ERISA's statutory framework and
in a proposed regulation by the Department of Labor that would require PBMs to make
certain disclosures to ERISA plans.

Pharmaceutical Care Management Ass’n v. District of Columbia, No. 04-1082 (RMU)
(D.D.C. Mar. 19, 2009).

Food and Drug Law/Life Sciences

Second Circuit Affirms Preliminary Injunction Blocking
Implementation Of FDA’s Pedigree Rule
The Second Circuit affirmed July 10, 2008 a New York federal district court’s 2006
issuance of a preliminary injunction blocking the Food and Drug Administration (FDA)
from implementing its pedigree rule, 21 C.F.R. § 203.50.

The Prescription Drug Marketing Act (PDMA), at 21 U.S.C. § 353(e)(1)(A), requires each
person engaged in the wholesale distribution of a prescription drug to provide a
statement (or pedigree) “identifying each prior sale, purchase, or trade of such
drug.” The statute does not specifically state whether this identification must extend back
to the manufacturer, or whether it must only extend to the last authorized distributor.

FDA had previously placed a hold on the chain of custody requirements contained in
regulations issued in 1999 to implement the PDMA because of concerns about the impact
on small wholesalers and to allow the industry time to adopt electronic technology for
tracking drugs through the supply chain.

The agency later withdrew the hold and scheduled the regulations to go into effect
December 1, 2006. However, plaintiff RxUSA Wholesale Inc., along with other
independent smaller wholesalers, challenged the pedigree rule in a lawsuit filed in the
U.S. District Court for the Eastern District of New York.

The district court granted plaintiffs’ request for a preliminary injunction in December
2006. FDA appealed.

“Because this case came before the District Court in the context of a preliminary
injunction, the court was not required to determine with certainty whether the FDA’s
actions were arbitrary or capricious, but merely whether [plaintiffs] had a 'better than 50
percent' chance of proving them so,” the Second Circuit said at the outset of its summary

The Second Circuit concluded that the district court had not abused its discretion in
finding plaintiffs demonstrated a likelihood of success on the question of whether the
FDA’s pedigree rule was “arbitrary and capricious” under the Administrative Procedure

“Under the PDMA, all authorized distributors are exempted from the statue’s pedigree
requirements,” the appeals court said. “Thus, if the FDA’s regulation were put into effect
as written, all lower-level distributors would be required to provide pedigree information
that is currently held only by authorized distributors.”

“The [district] court determined that this would effectively make it impossible for lower-
level distributors to comply with the law,” the appeals court explained.

The district court also took into consideration that the “FDA’s regulation is inconsistent
with the position taken by the agency in its original 1988 guidance letter, and it runs
directly counter to the 20-year history of industry reliance on the FDA’s initial position,”
the appeals court said.

These reasons were sufficient to support the district court’s finding that plaintiffs had
a 50% or greater chance of showing the pedigree rule was arbitrary and capricious, the
Second Circuit held.

“The [district court] also construed [plaintiffs'] challenge to the regulation as a question
of whether the FDA’s regulation is potentially arbitrary and capricious in light of the
PDMA’s exemption of authorized distributors and the current practice in the industry and
concluded that [plaintiffs] had demonstrated a likelihood of success on the merits of this
argument,” the appeals court noted, adding that it found “no reason to disturb these

The Second Circuit also rejected FDA’s argument that the district court’s preliminary
injunction was overbroad because it enjoined subsections within the challenged statute’s
implementing regulations (21 C.F.R. § 203.50(a)) to which plaintiffs did not specifically

The appeals court explained that the drug distribution industry has been operating for the
past 20 years on the basis of guidelines issued by FDA in 1988, and that these guidelines

contain requirements that are similar to the unchallenged subsections of the enjoined

“[G]iven the District Court’s intention of merely ‘maintaining the status quo’ until it could
determine the constitutionality of the regulation, it was not an abuse of discretion for the
court to refuse a piecemeal enforcement of the FDA’s regulation in favor of reliance on
the prevailing industry practice,” the appeals court said.

U.S. Dep’t of Health and Human Servs. v. RxUSA Wholesale Inc., No. 07-0453 (2d Cir.
July 10, 2008).

FDA Finalizes Rules On Label Changes
The Food and Drug Administration (FDA) issued a final rule (73 Fed. Reg. 49603)
amending its regulations to codify “the agency’s longstanding view” on when a
pharmaceutical manufacturer may change the labeling of an approved drug, biologic, or
medical device in advance of FDA review of such changes.

Under the rule, effective September 22, 2008, a supplemental application submitted
under certain provisions would be appropriate to amend the labeling for an approved
product only to reflect newly acquired information.

The final rule clarifies the definition of “newly acquired information” as data of a “different
type or greater severity or frequency than previously included in submissions to the FDA”
derived from new clinical studies, reports of adverse events, and new analyses of
previously submitted data.

In addition, the final rule clarifies that such a supplemental application may be used to
add or strengthen a contraindication, warning, precaution, or adverse reaction only if
there is sufficient evidence of a causal association with the drug, biologic, or device.

FDA issued a proposed rule in January 2008 (73 Fed. Reg. 2848), drawing sharp criticism
from consumer advocacy groups and some lawmakers that the proposal would make it
more difficult for drug sponsors to warn about new risks.

In the final rule, FDA disputed these concerns, emphasizing that the rule is intended to
spell out the agency’s existing labeling standards and policies, not amend the standards
under which sponsors must provide warnings about potential risks.

“FDA does not agree that this rule will make it more difficult to provide appropriate
warnings regarding hazards associated with medical products,” the final rule said.

FDA also declined suggestions to set different standards for when a sponsor must warn,
as opposed to when it may warn, of a particular risk or adverse events.

American Association for Justice (AAJ) President Les Weisbrod called the FDA final rule,
“irrational and designed to assist the manufacturers.” According to AAJ, an association of
trial lawyers, “[t]he rule allows drug and device companies to claim complete immunity
for failing to warn.”

AAJ also argued the FDA rule contradicted congressional intent under the Food and Drug
Administration Amendments Act of 2007 that drug companies must update prescription
drug labels to warn consumers of drug hazards at the earliest sign of a problem.

Under the new proposal, AAJ said, drug companies would only have to update a label
after they establish a "causal association" between the drug and the hazard, which could
take years.

FDA Posts List Of Drugs With Potential Safety Problems
The Food and Drug Administration (FDA) made available on its website September 5,
2008 its first statutorily required listing of prescription drugs with potential safety

A new federal law signed September 2007, the Food and Drug Administration
Amendments Act, mandates that FDA post, on a quarterly basis, new safety information
or potential signals of serious risk associated with prescription drugs on the market.

The information is based on reviews of FDA's Adverse Event Reporting System (AERS)
that flag drugs where the seriousness or frequency of reports justify further examination
of potential risks.

“My message to patients is this: Don't stop taking your medicine. If your doctor has
prescribed a drug that appears on this list, you should continue taking it unless your
doctor advises you differently,” said Janet Woodcock, M.D., director of FDA's Center for
Drug Evaluation and Research.

Woodcock’s statement reflects the agency’s concern that making this information public
may prompt some patients to stop taking needed medication despite an unclear picture
of the precise risks involved.

Among the 20 drugs, along with associated risks or new safety information, on the list,
which covers the time period from January 2008 through March 2008, are Duloxetine
(Cymbalta) for Urinary retention, Heparin for anaphylactic-type reactions, and Insulin U-
500 (Humulin R) for dosing confusion.

California Appeals Court Says FDA Labeling Regulations Do Not
Preempt State Law Failure-To-Warn Claim Against Drug
Food and Drug Administration (FDA) prescription drug labeling regulations do not
preempt a plaintiff’s state law tort action alleging a drug manufacturer failed to provide
adequate warnings about the generic drug it manufactured, a California appeals court
ruled September 25. 2008.

Overturning a lower court decision, the California Court of Appeal, Fifth Appellate District,
allowed the plaintiff to pursue her state law tort claims against the drug manufacturer.

Plaintiff Carylyne McKenney brought her action in state court against Purepac
Pharmaceutical Co. (Purepac) and other defendants, alleging she was injured after using
the prescription generic drug metoclopramide, which was manufactured by Purepac.
Metoclopramide is the primary active ingredient in the brand name drug Reglan.

McKenney’s complaint alleged the labeling of Purepac's generic drug contained false
and/or misleading statements and that the labeling substantially understated and
downplayed the risks of developing “tardive dyskinesia,” a condition McKenney had as a
result of her treatment with the drug.

The state trial court ultimately sustained Purepac's demurrer and rendered judgment in
its favor.

The trial court concluded that federal law preempted all of plaintiff’s state law claims
against Purepac, which is not the original manufacturer of Reglan. In reaching this
conclusion, the court emphasized that Purepac is a generic manufacturer of
metoclopramide and, as such, must obtain FDA approval before issuing any label on
metoclopramide that deviates from the labeling previously approved by the FDA for
Reglan. McKenney appealed.

In reversing the lower court’s decision, the state appeals court concluded the federal
requirement that a generic drug have the same labeling as a “reference listed” drug does
not necessarily result in federal preemption of a state tort action against the generic
manufacturer for failure to adequately warn of the drug's dangers.

The appeals court rejected Purepac’s argument that, under FDA regulations (21 C.F.R. §§
201.56, 201.80), Purepac could not deviate from the FDA-approved labeling for
metoclopramide, and therefore any civil liability to plaintiff under state law for failure to
adequately warn of the dangers of taking the drug was barred on conflict preemption
grounds, i.e., impermissibly conflicting with the FDA’s authority over drug labeling.

The appeals court said it saw “no indication [in the applicable regulations] that the FDA
itself has ever taken the position that its labeling requirements for generics would invoke
federal preemption principles so as to exempt manufacturers of generic drugs from tort

Further, in Carlin v. Superior Court, 13 Cal.4th 1104 (Cal. 1996), the state high court
expressly stated that “‘Congress evinced no intention of preempting state tort liability for
injuries from prescription drugs,’” the appeals court said.

McKenney v. Purepac Pharmaceutical Co., No F052606 (Sept. 25, 2008).

First Circuit Upholds State Law Regulating Use Of Prescribing
The First Circuit held November 18, 2008 that a New Hampshire law regulating the use of
prescription data did not amount to an unconstitutional restriction on commercial speech.

The appeals court ruling reverses an April 2007 decision by the U.S. District Court for the
District of New Hampshire finding the law unconstitutional and enjoining its enforcement.

Plaintiffs IMS Health Inc. and Verispan, LLC acquire prescription data from billions of
prescription transactions per year throughout the U.S. They then de-identify patient
information and sell the data to their clients, mostly pharmaceutical companies. The
pharmaceutical companies use the information to market to specific prescribers.

On June 30, 2006, the Prescription Information Law became effective in New Hampshire.
N.H. Rev. Stat. Ann. §§ 318:47-f, 318:47-g, 318-B:12(IV) (2006). The law expressly
prohibits the transmission or use of both patient-identifiable data and prescriber-
identifiable data for certain commercial purposes.

Plaintiffs sued, claiming the law impermissibly restricts their First Amendment right to
free speech.

“Because the Prescription Information Law restricts constitutionally protected speech
without directly serving the State’s substantial interests and because alternatives exist
that would achieve the State’s interests as well or better without restricting speech,” the
law cannot stand, the district court concluded.

Describing the New Hampshire law as an “innovative” approach to address the “spiraling
cost of brand-name prescription drugs,” the First Circuit disagreed with the lower court’s

According to the appeals court, the New Hampshire law regulates conduct, not speech.
The appeals court wrote:

       Unlike stereotypical commercial speech, new information is not filtered into the
       marketplace with the possibility of stimulating better informed consumer choices
       (after all, physicians already know their own prescribing histories) and the societal
       benefits flowing from the prohibited transactions pale in comparison to the
       negative externalities produced. This unusual combination of features removes
       the challenged portions of the statute from the proscriptions of the First

Moreover, even if the law amounted to a regulation of protected speech, the appeals
court said it still passed constitutional muster. “In combating this novel threat to the
cost-effective delivery of health care, New Hampshire has acted with as much
forethought and precision as the circumstances permit and the Constitution demands,”
the appeals court said.

In a statement, IMS Health said it was “disappointed” by the First Circuit decision and
was considering potential next steps.

Similar laws in Maine and Vermont also currently are being challenged. In December
2007, a federal district court agreed to preliminarily enjoin the enforcement of the Maine
statute that restricts the collection and disclosure of physician prescribing information for
marketing purposes that was set to go into effect January 1, 2008.

Plaintiffs are petitioning the Supreme Court to review the decision.

IMS Health Inc. v. Ayotte, No. 07-1945 (1st Cir. Nov. 18, 2008).

U.S. Court In Vermont Upholds State Law Regulating Use Of
Prescribing Data
A federal trial court refused April 23, 2009 to strike down as unconstitutional a Vermont
law that regulates the collection and use of data identifying healthcare providers’
prescribing patterns.

The U.S. District Court for the District of Vermont found the law, which was passed in
2007 and is slated to go into effect July 1, 2009, did regulate protected commercial
speech, but held it withstood scrutiny under the First Amendment.

Vermont is one of three states (in addition to Maine and New Hampshire) that have
enacted laws aimed at regulating so called “data mining” of physicians’ and other
providers’ prescribing habits, which is then used by pharmaceutical manufacturers for
their marketing activities, known as "detailing."

Plaintiffs IMS Health Inc., Verispan, LLC, and Source Healthcare Analytics, Inc. acquire
prescription data from billions of prescription transactions per year throughout the U.S.
They then de-identify patient information and sell the data to their clients, mostly
pharmaceutical companies.

The Vermont law, Act 80, prohibits pharmacies and other regulated entities from selling
or using prescriber-identifiable data for marketing or promoting prescription drugs unless
the prescriber consents—i.e., “opts-in.”

The law also creates an evidence-based education program for healthcare professionals
about the cost-effective utilization of prescription drugs that is funded by fees paid by
drug manufacturers.

In addition, the law creates a consumer fraud cause of action for advertisements
distributed in the state that violate federal advertising law.

Plaintiffs alleged the law violated the First Amendment, was vague and overbroad, and
violated the Dormant Commerce Clause. The Pharmaceutical Manufacturers of America
(PhRMA) also challenged the fee and advertising provisions. The district court upheld the
law, finding it passed constitutional muster.

As an initial matter, the court held prescriber identifiable data is protected “speech” and
therefore the law must comply with the First Amendment.

The court found the law was subject to intermediate scrutiny under the Central Hudson
framework. Central Hudson Gas & Elec. Corp. v. Public Serv. Comm’n 447 U.S. 557
(1980). Applying this analysis, the court held the law was constitutional.

First, the court found the legislature’s stated purpose of containing healthcare costs and
protecting the public interest were substantial government interests.

The court also concluded the legislature’s determination that prescription data “is an
effective marketing tool that enables detailers to increase sales of new drugs” was
supported in the record and therefore the law could help curb prescription drug costs.

Likewise, the court said evidence supported the legislature’s finding that new drugs often
provide little or no benefit over older drugs and unrestricted use of prescription data in
marketing may contribute to over-prescription of new drugs.

Thus, the legislature’s decision to restrict the use of prescription data in marketing to
further their substantial interest in protecting public health was sufficiently direct and
material, the court concluded.

Finally, the court held the law was narrowly tailored because it did not prohibit the
practice of detailing altogether, it just restricted the use of prescriber-identifiable data.

The court also rejected plaintiffs’ other constitutional challenges, including that the law
violated the Dormant Commerce Clause because it impermissibly affected interstate

While acknowledging the law would affect data vendors like plaintiffs located out of state,
the court said the regulation would be limited only to their activities in Vermont, not in
other states.

“Vermont prescription records are perfectly distinguishable from other states’ records,
and the Court sees no risk that [the law] will control [prescription] data sales for states
other than Vermont.”

The court went on to reject PhRMA’s First Amendment and Commerce Clause challenges
to the fee and advertising provisions of the law, saying they were too speculative and

The court also denied PhRMA’s contention that the provision regarding consumer
advertising conflicted with federal law—i.e., the Food and Drug Administration’s
regulation of drug advertising—and therefore was preempted.

The court saw no conflict with federal drug advertising law. Instead, the court said, on its
face the law “simply creates an additional remedy for violations of federal prescription
drug advertising law.”

IMS Health Inc. v. Sorrell, No. 1:07-CV-188 (D. Vt. Apr. 23, 2009).

Pfizer Announces $894 Million Settlement Of Bextra, Celebrex
Pfizer, Inc. announced October 17, 2008 that it has agreed to a global $894 million
settlement to resolve “substantially all of the personal injury cases, consumer fraud cases
and state attorneys general claims” involving its non-steroidal anti-inflammatory (NSAID)
pain medications Bextra and Celebrex.

The agreement covers “more than 90 percent of the known personal injury claims
brought by law firms” alleging that Pfizer’s NSAID pain medications were the cause of a
heart attack, stroke, or other injury, Pfizer said in a press release.

In addition, the settlement resolves payor class action consumer fraud cases involving
Bextra and Celebrex in which the plaintiffs alleged economic loss relating to the
promotion of the drugs. The settlement also covers claims brought by 33 states and the
District of Columbia regarding Bextra promotional practices.

Although the company voluntarily withdrew Bextra, its press release emphasized that
“Pfizer stands by the safety and efficacy profile of Celebrex.”

Celebrex “is one of the most rigorously- and continuously-studied drugs in the world, as
evidenced by its approval and use in 111 countries during the past 10 years across
several different pain indications,” said Joseph M. Feczko, chief medical officer for Pfizer.

The $894 million settlement will be broken down as follows: $745 million for personal
injury claims; $60 million for state attorneys general settlements; and $89 million for
consumer fraud class action claims.

Connecticut Attorney General Richard Blumenthal said October 22 that his state will
receive $1.7 million under the settlement with Pfizer. According to Blumenthal's press
release, the $60 million overall settlement with the states also imposes strict reforms to
prevent deceptive promotion of Pfizer products.

"Our five-year investigation into Pfizer revealed that the company aggressively and
deceptively promoted Celebrex and Bextra with misleading marketing about the safety
and efficacy of both drugs, which cause serious potential side effects, including risk of
heart attacks and strokes," Blumenthal said.

The state lawsuits alleged that, although the Food and Drug Administration rejected a
request to market high-dose Bextra for acute and surgical pain, Pfizer conducted a
systematic off-label promotion campaign.

As part of the settlement with the states, according to Blumenthal's press release, Pfizer
is prohibited from, among other things, distributing samples with the intent to encourage
off-label prescribing; distributing off-label studies and articles in a promotional manner;
using "mentorships" to pay physicians for time spent with Pfizer sales reps; and using
patient testimonials to misrepresent a drug's efficacy.

In an October 22, 2008 statement, Pfizer denied the allegations in the complaints that its
promotional practices violated state laws.

Supreme Court Finds No Federal Preemption Of State Failure-To-
Warn Claims Against Drug Maker
The Supreme Court held March 4, 2009 in the closely watched Wyeth v. Levine case that
federal law does not preempt state failure-to-warn claims involving the labeling of
prescription drugs regulated by the Food and Drug Administration (FDA).

The 6-3 opinion, authored by Justice Stevens, rejected drug maker Wyeth’s argument
that state tort claims like those at issue obstruct the federal regulation of drug labeling.

According to the majority, Congress has repeatedly declined to preempt state law in this
area. The majority also gave no weight to the FDA’s position in recently promulgated
regulations that state tort suits interfere with its statutory mandate, saying this stance
represents a dramatic shift from the agency's long-standing view that state actions
complement the FDA’s role in protecting consumers.

In a statement, Wyeth called the ruling disappointing. “Patients are best served by a
national standard for the labeling of prescription medications—set by the medical and
scientific experts at the U.S. Food and Drug Administration (FDA). When lay juries are
permitted to second-guess the experts at FDA on the benefits and risks of particular
medicines, the result is uncertainty for patients and doctors alike about how and when to
use prescription drugs,” the company said.

Consumer groups, however, hailed the opinion. “We are extremely gratified that the U.S.
Supreme Court today in Wyeth v. Levine upheld the traditional right of patients harmed
by defective and mislabeled drugs to sue drug companies to recover compensation for
their injuries,” Public Citizen said in a statement.

“[L]egal immunity for drug manufacturers—as called for by the drug companies and the
Bush administration—would have been a huge mistake,” the group said.

Failure-to-Warn Claims

In the case, a jury awarded plaintiff Diane Levine a substantial judgment against Wyeth,
which the trial court and later the Vermont Supreme Court affirmed. See Levine v.
Wyeth, 944 A.2d 179 (Vt. 2006).

Levine, a musician, lost her arm to gangrene after an intravenous arterial injection of
Wyeth’s drug, Phenergan. In her Vermont state court suit, Levine alleged Wyeth was
negligent when it failed to adequately warn of the known dangers associated with the
drug’s intravenous administration and the risk of inadvertent arterial injection.

Phenergan, an antihistamine used to treat nausea, generally is injected into the muscle,
but, in its FDA-approved label, provides directions for intravenous use as well. A jury
found that Wyeth should have provided a warning against the drug’s administration
through intravenous injection, known as “IV push.”

Wyeth argued that it was immune from liability in the state negligence suit because the
FDA had previously approved Phenergan’s label. According to Wyeth, federal law
impliedly preempted Wyeth’s failure-to-warn claims.

The Vermont Supreme Court found no preemption of the state tort claims, saying they
did not conflict with FDA’s labeling requirements for the drug because Wyeth could have
warned against IV-push administration without prior agency approval and because
federal labeling requirements create a floor not a ceiling.

Court Rejects Impossibility Argument

The Court majority in its opinion affirming the Vermont Supreme Court decision rejected
Wyeth’s argument that it would be impossible for it to comply with both the state law
duties underlying the negligence claims and its duties under federal labeling regulations.

While Wyeth contended that it was constrained from changing its label without first
obtaining FDA approval, the majority disagreed with Wyeth's analysis of the agency’s
“changes being effected” (CBE) regulation.

The CBE regulation initially provided that a manufacturer could “add or strengthen” a
warning if it filed a supplemental application with the FDA, but could make the changes
without the agency’s approval.

FDA amended the CBE regulation in 2008 to indicate that a manufacturer may only
change a drug label “to reflect newly acquired information.”

The Court sidestepped the question of whether the 2008 CBE regulation was consistent
with the Federal, Food, Drug, and Cosmetic Act (FDCA) and the FDA’s previous version of
the regulation, concluding Wyeth could have revised Phenergan’s label even in
accordance with the amended regulation.

Levine presented evidence of at least 20 incidents prior to her injury in which a
Phenergan injection resulted in gangrene and an amputation, the Court noted. As these
incidents continued over the years, Wyeth could have analyzed the accumulating data
and added a stronger warning about IV-push administration without first obtaining FDA

Moreover, “the very idea that the FDA would bring an enforcement action against a
manufacturer for strengthening a warning pursuant to the CBE regulation is difficult to
accept—neither Wyeth nor the United States has identified a case in which the FDA has
done so,” the Court wrote.

Statutory Purpose

Wyeth argued that the FDCA established both a floor and a ceiling for regulating a drug’s
label, but the Court said the evidence of Congress’ purposes in enacting and amending
the statute pointed to the contrary.

For example, the Court said, Congress failed to provide a federal remedy for consumers
harmed by unsafe or ineffective drugs under the FDCA.

The Court also highlighted that Congress did not include an express preemption provision
“at some point during the FDCA’s 70 year history.” In this regard, the Court contrasted
the FDCA with the Medical Device Amendments of 1976 (MDA), which do include an
express preemption provision with respect to medical devices.

The Supreme Court ruled last year that the MDA preempts state common law claims
challenging the safety and effectiveness of a medical device that has received
FDA premarket approval. Riegel v. Medtronic, Inc., No. 06-179 (U.S. Feb. 20, 2008).

Majority Affords No Weight To Recent FDA Regulatory Stance

In the preamble of the 2006 amendments to the drug labeling regulations, FDA stated
that “under existing preemption principles, FDA approval of labeling . . . preempts
conflicting or contrary State law.” 71 Fed. Reg. 3922.

While Wyeth relied on the preamble to advance its preemption argument, the Court said
the agency’s views on state law expressed in the regulation “reverse[d] the FDA’s own
longstanding position without providing a reasoned explanation.”

According to the Court, “[n]ot once prior to Levine’s injury did the FDA suggest that state
tort law stood as an obstacle to its statutory mission.”

Rather, the agency had previously disclaimed that federal labeling standards preempted
state failure-to-warn claims.

Thus, the majority affirmed the judgment of the Vermont Supreme Court, finding Levine’s
common law claims did not stand as an obstacle to the statutory purposes of the FDCA.

Far-Reaching Implied Preemption

Justice Thomas agreed with the judgment but wrote a separate concurrence objecting to
“the majority’s implicit endorsement of far-reaching implied pre-emption doctrines.”

Thomas said he has become “increasingly skeptical of the Court’s ‘purposes and
objectives’ pre-emption jurisprudence” under which the Court “routinely invalidates state
laws based on perceived conflicts with broad federal policy objectives, legislative history,
or generalized notions of congressional purposes that are not embodied within the text of
federal law.”


In his dissent, Justice Alito said the case “illustrates that tragic facts make bad law.”

The dissent argued the majority framed the issue of the case too narrowly and said the
real question was whether a state jury “can countermand the FDA’s considered judgment
that Phenergan’s FDA-mandated warning label renders its intravenous use ‘safe.’”

According to the dissent, the FDA had long known the risk associated with IV push and,
wisely or not, concluded the drug was “safe” and “effective” when used in conjunction
with its approved label.

“[T]urning a common-law tort suit into a ‘frontal assault’ on the FDA’s regulatory regime
for drug labeling upsets the well-settled meaning of the Supremacy Clause and our
conflict preemption jurisprudence,” Alito wrote.

Wyeth v. Levine, No. 06-1249 (U.S. Mar. 4, 2009).

Third Circuit Says Vaccine Act Preempts Design Defect Claims
Against Vaccine Manufacturer
The National Childhood Vaccine Injury Act (Vaccine Act) expressly preempts all design
defect claims against the manufacturer of a vaccine, the Third Circuit ruled March 27,

In so holding, the appeals court rejected a different result reached by the Georgia
Supreme Court in American Home Prods. Corp. v. Ferrari, 669 S.E.2d 236 (Ga. 2008),
which called for a case-by-case analysis of whether particular vaccine side effects are

This approach, according to the Third Circuit, would essentially swallow the Vaccine Act's
express preemption provision because it would subject every design defect claim to court

The case involved 17-year old Hannah Bruesewitz who allegedly suffers a number of
adverse side effects stemming from the third of a five-dose series of the diphtheria-
pertussis-tetanus (DPT) she received as an infant.

Her parents (plaintiffs) brought an action against Wyeth, Inc. and its predecessors
(Wyeth), which manufactured the vaccine Hannah received.

As required under the Vaccine Act, plaintiffs filed a petition in the Vaccine Court (part of
the U.S. Court of Federal Claims) in 1995, alleging her residual injuries were caused by
the Wyeth vaccine.

The court dismissed their claim with prejudice. Plaintiffs then brought an action in state
court against Wyeth alleging, among other things, negligent design because the
manufacturer knew of a safer alternative and failed to produce it and strict liability for a
design defect.

Wyeth removed the action to federal court based on diversity and moved for summary
judgment. The federal district court granted Wyeth’s motion, finding the Vaccine Act
preempted all design defect claims arising from a vaccine-related injury or death.

The Third Circuit affirmed, concluding the Vaccine Act’s express preemption provision
encompassed the claims at issue here.

The Vaccine Act, enacted in 1986, includes an express preemption provision stating that
“[n]o vaccine manufacturer shall be liable in a civil action for damages arising from a
vaccine-related injury or death . . . if the injury or death resulted from side effects that
were unavoidable.”

Plaintiffs argued that because the provision qualifies the scope of preemption based on
whether the injury or side effect was “unavoidable,” the issue of “avoidability” must first
be addressed on a “case-by-case” basis as part of examining a design defect claim.

This was essentially the conclusion reached by the Georgia Supreme Court
in Ferrari, which found that by including the word “unavoidable” in the preemption
provision Congress made the language conditional and implied that some vaccine-related
injuries and deaths could be avoided.

But the Third Circuit did not find the interpretation in Ferrari compelling. “[W]hile we
recognize that the language is conditional, such a reading does not foreclose the
preemption of some claims,” the appeals court wrote.

“More importantly, we think the Ferrari court’s construction is contrary to the structure of
the Act because it does not bar any design defect claims,” the appeals court said.

In reaching its conclusion, the appeals court relied heavily on legislative history, after
noting that the statute did not define the term “unavoidable.”

Specifically, the appeals court cited a relevant committee report that stressed the
importance of vaccine development and availability, expressed serious concern over the
withdrawal of even a single vaccine manufacturer from the marketplace, and set forth a
regime to compensate individuals that sought to reduce and stabilize litigation costs while
also enabling manufacturers to estimate the costs associated with compensation.

“Each of [these] objectives,” the appeals court said, “would be undermined if design
defect claims were permitted under the statute.”

The appeals court also took care to distinguish the instant case from the Supreme Court’s
recent decision in Wyeth v. Levine, No. 06-1249 (2009), which held that federal law did
not preempt state tort law claims alleging a drug manufacturer failed to adequately warn
of the dangers associated with a drug.

The Third Circuit said here the statute at issue included an express preemption provision
that was prompted by the prevalence of state tort litigation. Moreover, under federal law,
a drug manufacturer can strengthen a drug’s label without preapproval from the Food
and Drug Administration.

Bruesewitz v. Wyeth Labs., No. 07-3794 (3d Cir. Mar. 27, 2009).

Medical Devices
U.S. Court In Texas Finds Claims Against Device Manufacturer
Not Preempted By MDA
The U.S. District Court for the Northern District of Texas held August 13, 2008 that a
plaintiff’s strict liability and breach of warranty claims against a cochlear implant
manufacturer were not preempted by the Medical Devices Amendments of 1976 (MDA)
because the claims were based solely on violations of federal law.

Plaintiff B.P. is a deaf minor. To improve B.P.’s hearing, surgeons implanted a cochlear
ear device, the HiRes90k, manufactured by Defendant Advanced Bionics Corporation

Bionics issued a voluntary recall of all HiRes90k devices containing Astro Seal feed-thrus,
which B.P.’s device contained. Although the recall covered only non-implanted devices,
plaintiffs elected to have B.P. undergo surgery to remove his two cochlear implants.

Bionics tested those units and determined that the moisture levels in them were well
above the maximum moisture level provided in the manufacturing specifications and
approved by the Food and Drug Administration (FDA).

Plaintiffs sued Bionics alleging negligence, strict liability, fraud, and breach of warranty.
Plainitffs alleged that after obtaining premarket approval from FDA on the device, Bionics
contracted with a different company to manufacture the feed-thrus.

According to plaintiffs, Bionics failed to notify the FDA of its new supplier, and Astro Seal
altered the device's mechanical configuration and made changes to the length,
composition, and "firing" process for the glass used in the feed-thrus.

Plaintiffs also pointed to inspection reports and warning letters issued by the FDA to
Bionics which document multiple violations of Current Good Manufacturing Practices
(CGMP) requirements and notes that FDA took in an enforcement action against Bionics
for violations of CGMP and premarket approval requirements.

The court first turned to defendant’s argument that plaintiffs' strict liability and implied
warranty claims were preempted by the MDA.

In determining whether Texas law regarding strict liability imposes duties "different from,
or in addition to" those imposed by the MDA, the court noted that plaintiffs claims were
“predicated solely on violations of federal law.”

The court explained that in Medtronic, Inc. v. Lohr, the Supreme Court concluded that
state law claims predicated on violations of federal law were not preempted. See 518
U.S. 470 (1996).

The court further noted that in Riegel v. Medtronic, 128 S.Ct. 999 (2008), the High Court
affirmed this part of the holding in Lohr.

Accordingly, the court found the MDA did not preempt plaintiff’s strict liability claims.

Turning next to plaintiff’s claim for breach of the implied warranty of merchantability, the
court found that claim also was predicated solely on violations of federal law.

“Although the duties underlying Plaintiffs' implied warranty claims potentially differ from
the relevant federal requirements, enforcement of those claims would not interfere with
the federal regulatory scheme for medical devices, since Defendants' compliance with the
applicable federal requirements would preclude liability under state law, as was the case
in Lohr,” the court found.

“Because dismissal of Plaintiffs' claims for breach of the implied warranty of
merchantability would not serve the policies underlying preemption, preemption is not
warranted here,” the court held.

Purcel v. Advanced Bionics Corp., No. 3:07-CV-1777-M (N.D. Tex. Aug. 13, 2008).

U.S. Court In Minnesota Finds MDA Preempts Claims Against
Device Manufacturer
The U.S. District Court for the District of Minnesota held August 18, 2008 that the Medical
Device Amendments (MDA) to the Food, Drug, and Cosmetic Act preempted a plaintiff's
claims against the manufacturer of his implantable cardioverter-defibrillator (ICD).
According to the court, the plaintiff offered no direct evidence of the device
manufacturer's negligence and his reliance on res ipsa loquitor failed because the device
could have malfunctioned for a variety of reasons unrelated to negligence.

Plaintiff Demetrus Claude Clark received a Medtronic 7278 Maximo ICD on September 8,
2004. The device was implanted after plaintiff was diagnosed with non-ischemic
cardiomyopathy, a disease of the heart muscle.

After the implantation, plaintiff returned to the hospital six times complaining that the
ICD was delivering "inappropriate shocks." Eventually, hospital staff determined that the
shocks were caused by T-wave oversensing, and removed the ICD.

Plaintiff sued Medtronic (defendant) alleging multiple state tort claims including strict
liability, breach of warranty, negligence, misrepresentation, and violation of Minnesota's
consumer protection laws.

Plaintiff claimed defendant was negligent in the design and manufacture of the ICD Model
7278 and/or failed to warn him, his doctor, or the Food and Drug Administration (FDA) of
unreasonable risks in its manufacture or reliability. Defendant moved for summary
judgment based on federal preemption because Class III medical devices are regulated
under the MDA.

The district court first explained that in Riegel v. Medtronic, Inc., 128 S.Ct. 999 (2008),
the Supreme Court established a two-part test to decide whether the MDA preempts a
state claim. According to the court, it must first determine whether "the Federal
Government has established requirements applicable to" the particular medical device
and second, it must determine whether the state law claims are based on requirements
"different from, or in addition to" the federal requirements relating to safety and
effectiveness or any requirement under the MDA.

Plaintiff argued that Medtronic violated the premarket approval requirements of the MDA
when it manufactured a defective ICD, or, alternatively, that premarket approval was
fraudulently obtained by Medtronic's having concealed known defects in its ICD's design
or manufacture.

According to the court, however, plaintiff offered "no evidence to support his assertions."
Instead, plaintiff relied on the doctrine of res ipsa loquitur for the proposition that full
compliance with the premarket approval requirements would have resulted in a problem-
free device, the court said.

In finding that a res ipsa loquitor argument failed here, the court noted that Medtronic's
ICD is a complex device that "can fail for a variety of reasons," all of which may occur
without someone acting in a negligent manner.

"Because defendant's negligence is not the only possible explanation for this device's
failure, plaintiff's reliance on res ipsa loquitur cannot be sustained," the court held.

Clark v. Medtronic, No. 06-CV-4078 (JMR/AJB) (D. Minn. Aug. 18, 2008).

Wisconsin Supreme Court Says Supplemental Premarket Approval
Does Not Affect Riegel Preemption Analysis
The Medical Device Amendments of 1976 (MDA) preempt state tort claims against
Medtronic Inc. even though the device giving rise to the negligence and strict liability
allegations was implanted after the Food and Drug Administration (FDA) gave
supplemental premarket approval to correct a problem with the original device, the
Wisconsin Supreme Court ruled February 17, 2009.

The high court said the decision was governed by the U.S. Supreme Court’s ruling in
Riegel v. Medtronic, Inc., 128 S.Ct. 999 (2008), which held that the MDA preempts state
common law claims challenging the safety and effectiveness of a medical device that
received FDA premarket approval.

According to the high court, the Riegel framework applied because the original premarket
approval was ongoing despite the FDA's subsequent approval of changes to the device to
correct a faulty battery.

At issue in the instant action was a Medtronic Marquis 7230 defibrillator, which received
the FDA’s device-specific premarket approval in 2002. Medtronic later uncovered a
potential shorting problem with the defibrillator’s battery that could cause the device to

Medtronic submitted a premarket approval supplemental application to address the issue
and the FDA approved the changes in October 2003. Following the supplemental
premarket approval, Medtronic continued to market and distribute the original
defibrillator, including the one implanted in plaintiff Joseph Blunt in May 2004.

Blunt later had the potentially faulty defibrillator removed. He then sued Medtronic
alleging negligence and strict liability based on the second surgery.

Both the lower court and the appeals court, before the Riegel decision, granted summary
judgment to Medtronic.

A unanimous Wisconsin Supreme Court affirmed, relying specifically on Riegel to conclude
the MDA preempted Blunt’s state law tort claims.

In Riegel, the majority of the Court held the “premarket approval” process imposes
device-specific requirements under the MDA and that state “tort duties” constitute
“requirements” pursuant to the statute that are “different from, or in addition to federal

The Wisconsin high court found Blunt’s claims fit squarely within the parameters outlined
in Riegel and therefore were preempted by the MDA.

Most notably, the high court said the preemption analysis was not altered by the FDA’s
supplemental premarket approval of the defibrillator in 2003.

Blunt argued his claims were not preempted because the supplemental premarket
approval superseded the FDA’s premarket approval of the original device, which was the
one he received in 2004.

But the high court disagreed, saying nothing in the MDA “advises that a device-specific
approval once given is diminished by a supplemental approval for changes to that device
without a further act by the FDA.”

The FDA had not affirmatively withdrawn or recalled Medtronic’s approval to manufacture
and sell the original defibrillator, the high court noted. Rather, the FDA’s approval of the
original device remained ongoing.

Thus, the high court concluded “the supplemental premarket approval that Medtronic
received did not affect the federal requirement of premarket approval granted to the
original Marquis 7230 defibrillator.”

A concurring opinion agreed the result reached in the decision was mandated by the
Riegel holding, but criticized the Supreme Court’s decision in that case.

The concurrence said the rationale underlying the Riegel decision “may be meritorious if
the premarket approval process provided at least minimum assurances of safety.”

The opinion pointed to a January 2009 letter from nine FDA scientists that the current
FDA approval process is “a clear and silent danger to the American public.”

“The preemption doctrine should not be employed to allow for the normal standard of
care to be substandard care,” the opinion warned.

Blunt v. Medtronic, Inc., No. 2006AP1506 (Wis. Feb. 17, 2009).

Bill Would Allow State Law Tort Claims Involving Medical
Devices With FDA Approval
House lawmakers Frank Pallone Jr. (D-NJ) and Henry A. Waxman (D-CA) introduced
March 5, 2009 legislation to reverse the U.S. Supreme Court’s decision in Riegel v.
Medtronic, Inc., No. 06-179 (U.S. Feb. 20, 2008), which held that the Medical Device
Amendments of 1976 (MDA) preempt state common law claims challenging the safety
and effectiveness of a medical device that received Food and Drug Administration (FDA)
premarket approval.

Waxman, House Energy and Commerce Committee Chairman, and Pallone,
Subcommittee on Health Chairman, said in a joint statement that the Court’s decision
“ignores both congressional intent and 30 years of experience in which federal regulation,
through the U.S. Food and Drug Administration, and tort liability played complementary
roles in protecting consumers from device risks."

The Medical Device Safety Act of 2009 would explicitly clarify that state product liability
lawsuits are not preempted by federal law. The lawmakers introduced similar legislation
last year.

Health, Education, Labor and Pensions Committee Chairman Edward Kennedy (D-MA) and
Judiciary Committee Chairman Patrick Leahy (D-VT) have introduced a companion bill in
the Senate.

In the Riegel decision, the Court majority concluded the “rigorous” premarket approval
process results in federal device-specific requirements and that state tort claims are
preempted because they would allow a jury to impose “different” or “additional” safety
and effectiveness standards on the device manufacturer than those mandated under
federal law.

At issue in the case was the interpretation of the express preemption provision in
the MDA to the federal Food, Drug, and Cosmetic Act, which provides that states may not
establish “any requirement” for medical devices that is “different from, or in addition to”
those under federal law and that “relates to the safety or effectiveness of the device . . .”
21 U.S.C. § 360k(a).

According to Pallone and Waxman, the Riegel decision “has left consumers without any
ability to seek compensation for their injuries” and also “removed one of the industry’s
most important incentives to maintain product safety after approval and disclose newly-
discovered risks to patients and physicians.”

AdvaMed issued a statement criticizing the legislation, saying the bill “does not in any
way improve patient safety” but would “restrict patient access to essential medical
technologies, produce a chilling effect on medical innovation, create more lawsuits and
ultimately result in higher health care costs for all Americans."

Industry Interactions with Healthcare Professionals

PhRMA Adopts Revised Marketing Code With New Provisions On
Interactions Between Sales Reps And Healthcare Professionals
The Pharmaceutical Research and Manufacturers of American (PhRMA) Board of Directors
announced July 10, 2008 that it has adopted a revised PhRMA Code on Interactions with
Healthcare Professionals to ensure that pharmaceutical marketing practices comply with
the highest ethical standards, according to a press release issued by PhRMA.

The voluntary Code, which becomes effective January 2009, “reaffirms that interactions
between company representatives and healthcare professionals should be focused on
informing the healthcare professionals about products, providing scientific and
educational information, and supporting medical research and education,” the release

Among several changes in the revised Code are new provisions prohibiting the
distribution of non-educational items (such as pens, mugs and other “reminder” objects
adorned with a company or product logo) to healthcare providers and their staff.

The revised Code notes that such items are often “of minimal value,” but nonetheless
recognizes they “may foster misperceptions that company interactions with healthcare
professionals are not based on informing them about medical and scientific issues,” the
release said.

Another new provision prohibits company sales representatives from providing restaurant
meals to healthcare professionals. Sales representatives are allowed, however, to provide
occasional meals in healthcare professionals’ offices in conjunction with informational

In addition, the revised Code reaffirms PhRMA’s position that companies should not
provide any entertainment or recreational benefits to healthcare professionals.

The revised Code also includes new provisions that require companies to ensure that their
sales representatives are sufficiently trained about applicable laws, regulations, and
industry codes of practice that govern interactions with healthcare professionals.

Another provision recommends that companies assess their representatives periodically
and take appropriate action if they fail to comply with relevant standards of conduct.

Companies opting to follow the revised Code must state their intentions to abide by the
Code’s provisions, and each company’s chief executive officer and compliance officer
must certify each year that they have processes in place to meet compliance

The revised Code includes several other important additions, including more detailed
standards regarding the independence of continuing medical education and more
comprehensive guidance regarding speaking and consulting arrangements with
healthcare professionals.

There are also new disclosure requirements in the revised Code for healthcare providers
who are members of committees that set formularies or develop clinical practice
guidelines and who serve as speakers or consultants for a pharmaceutical company.

PhRMA referred to its recent acceptance of the revised Physician Payments Sunshine Act
(S. 2029), which was released by Senators Herb Kohl (D-WI) and Charles Grassley (R-IA)
in May 2008. The bill would require manufacturers of pharmaceutical drugs, devices, and
biologics to disclose all gifts or other “transfers of value” over $500 a year given to

AdvaMed Issues Revised Code Of Ethics On Interactions With
Healthcare Professionals
On December 18, 2008, the Advanced Medical Technology Association (AdvaMed)—the
national trade association of medical technology manufacturers—issued a revised Code of
Ethics on Interactions with Health Care Professionals (HCPs) (the AdvaMed Code or
Code). The revised AdvaMed Code, which becomes effective July 1, 2009, contains
several changes that will significantly impact the medical device industry. These include:

      The addition of guidelines for the payment of royalties to HCPs;

      The inclusion of a new section on the provision of evaluation and demonstration
       products to customers at no charge;

      More comprehensive guidelines for furnishing reimbursement and health
       economics information to HCPs;

      A prohibition on the provision of entertainment and recreation;

      A prohibition on the provision of non-educational branded promotional items such
       as pens, notepads, mugs and similar items; and

      Increased restrictions on the provision of restaurant meals or meals at other off-
       site venues.

More generally, the revisions to the AdvaMed Code seek to strike the appropriate balance
between encouraging beneficial, productive interactions between device manufacturers
and HCPs and establishing safeguards to ensure that such arrangements meet high
ethical standards and are conducted in a manner that is consistent with fraud and abuse
authorities. It is also important to note that the revised AdvaMed Code applies to all
medical device “Companies”—the prior version, by its plain terms, applied only to
AdvaMed “Members.” Thus, while each device manufacturer must make its own decision
regarding whether to comply with the AdvaMed Code, irrespective of that decision, the
revised Code’s provisions extend to all medical device manufacturers, and, as such,
arguably establish industry standards.

Grassley, Kohl Introduce Bill Requiring Disclosure Of Financial
Ties Between Drug Companies And Physicians
Senators Charles Grassley (R-IA) and Herb Kohl (D-WI) introduced January 22, 2009 the
Physician Payments Sunshine Act of 2009, which would require manufacturers of
pharmaceuticals, medical devices, and biologics to publicly report money given to
physicians over $100 every year.

The payments would be reported to the Department of Health and Human Services and
would be posted online for the public. The bill would impose penalties as high as $1
million for knowingly failing to report the information, Grassley said.

The Senators introduced a similar bill in 2007, but that measure (S. 2029) was never
considered by Congress. This new version incorporates recent recommendations made by
the Medicare Payment Advisory Commission (MedPAC).

"Since we first introduced the bill, there has been a groundswell of support from every
corner," Kohl said. "Patients want to know that they can fully trust the relationship they
have with their doctor. I am confident this legislation will pass during the 111th

Both Grassley and Kohl have pushed for years for greater public accountability of
financial relationships between physicians and the drug, device, and biologic industry.

"The goal of our legislation is to lay it all out, make the information available for everyone
to see, and let people make their own judgments about what the relationships mean or
don't mean," Grassley said. "If something's wrong, then exposure will help to correct it.
Like Justice Brandeis said almost a century ago, 'sunshine is the best disinfectant.'"

Massachusetts Finalizes Regulations Governing Sales And
Marketing Practices Of Pharmaceutical, Device Firms
The Massachusetts Public Health Council (PHC) passed March 11, 2009 final regulations
to implement a state law enacted in 2008 governing gift-giving and other sales and
marketing practices of pharmaceutical and medical device firms.

According to Massachusetts officials, the new rules, which mandate broad public
disclosure of fees, payments, and other compensation by companies to healthcare
providers, will be some of the toughest in the nation.

PHC issued proposed regulations in 2008 to implement legislation enacted in August of
that year requiring pharmaceutical and device companies to adopt a state-authored
marketing code of conduct and publicly disclose any economic benefits provided to
physicians and other healthcare providers in excess of $50.

In a press release, Department of Public Health (Department) Commissioner John
Auerbach said the rules generated more than one thousand pages of testimony and
commentary from the public, healthcare advocates, and the industry.

“I believe the enormous amount of feedback, and the thorough consideration by the
Public Health Council, has resulted in a strict but balanced regulation,” Auerbach said.

Under the new regulations, which the PHC approved in a 10 to 0 vote, Massachusetts also
will be the first state to require disclosure of industry payments by medical device firms.

In a memo discussing the comments on the proposed rules, the Department said the final
regulations include some minor edits and “language changes to increase clarity and
ensure the consistent use of terminology,” as well as “substantive changes that respond
to the testimony received.”

For example, consumer groups had raised concerns that an exemption from disclosure
payments made to healthcare providers for research projects and clinical trials could be
used to circumvent the rules.

In response, the Department amended the definition of “sales and marketing activities”
to specifically include research projects that are designed or sponsored by marketing
departments, known as “seeding trials,” to promote sales.

The Department declined, however, to include an across-the-board gift ban, recognizing
“that some industry interactions are beneficial and should be allowed to continue.”

The Department also made a number of amendments in response to industry concerns,
including explicitly providing for exemptions from disclosure for the provision of price
concessions such as rebates and discounts, prescription drugs provided to a covered
recipient solely and exclusively for use by patients, and demonstration and evaluation

In light of industry comments, “the Department determined that requiring disclosure of
price concessions such as rebates and discounts may lead to a restraint of trade in
violation of Federal Trade Commission requirements,” the memo said.

The regulations set a July 1, 2009 compliance deadline for adopting the marketing code
of conduct. Drug and device must begin making annual disclosure reports starting July 1,
2010 under the regulations.

Eli Lilly, Merck Announce Planned Online Registry Of Payments
To Physicians
Eli Lilly and Company will become the first pharmaceutical research company to disclose
its payments to physicians in an online registry, Eli Lilly president and chief executive
officer, John Lechleiter, Ph.D., said September 24, 2008.

In a speech before the Economic Club of Indiana, Lechleiter said the company plans to
launch the registry in 2009.

Eli Lilly also was the first pharmaceutical manufacturer to endorse federal legislation,
known as the Physician Payments Sunshine Act. The legislation would establish a national
registry of payments to physicians by medical device, medical supply, and pharmaceutical

"Though we remain hopeful that the Sunshine Act will be passed by Congress at some
point, Lilly is taking action independently," Lechleiter added.

Under Lilly's plan, the public will have access to an Internet database listing its payments
to physicians, including 2009 payments to physicians who serve the company as
speakers and advisors.

By 2011, Lilly plans to expand the reporting capabilities of the registry to resemble the
Sunshine Act legislation.

On September 25, 2008 Merck and Co., Inc. announced that it also will publish its grants
to patient organizations, medical professional societies, and other organizations on its
website in order to enhance transparency.

According to a company press release, Merck will make available grants made by its
Global Human Health division to U.S. organizations for independent professional
education initiatives, including accredited continuing medical education.

The company also said that it is "committed to begin disclosure in 2009 of payments to
physicians who speak on behalf of our company or our products."

Pfizer Announces Physician Payment Disclosure Program
Pfizer Inc. announced February 9, 2009 that it will publicly disclose payments made to
U.S. physicians for consulting services, speaking engagements, and conducting clinical

According to Pfizer, its disclosure will include payments made to practicing U.S.
physicians and other healthcare providers, as well as principal investigators, major
academic institutions, and research sites for clinical research.

“This makes Pfizer the first biopharmaceutical company to commit to reporting payments
for conducting Phase I-IV clinical trials in addition to disclosing payments for speaking
and consulting . . . [and] demonstrates Pfizer’s commitment to increased transparency
and public candor,” the company said in a press release.

Pfizer said it plans to publish its first annual online update on its website in early 2010
and will include payments made from July 1, 2009, going forward.

“We are committed to taking the steps necessary to achieve greater transparency in our
interactions with U.S. healthcare professionals,” said Jeffrey B. Kindler, Chairman and
Chief Executive Officer of Pfizer.

“By disclosing payments to physicians, we are breaking down a major barrier and
increasing the trust healthcare providers must have when prescribing our medicines. To
be viewed as an open, candid and transparent company, we must address the concerns
of our customers and take action. This new initiative does just that,” Kindler added.

On January 22, 2009 Senators Charles Grassley (R-IA) and Herb Kohl (D-WI) introduced
the Physician Payments Sunshine Act of 2009, which would require manufacturers of
pharmaceuticals, medical devices, and biologics to publicly report money given to
physicians over $100 every year.

Pfizer said in its release that its plans “reflect the spirit” of that legislation “in that it
includes payments to practicing physicians and other healthcare providers as well as to
principal investigators and institutions for Phase I-IV clinical trials sponsored by Pfizer.”

IOM Joins Call For More Transparency Of Medical Community’s
Ties To Industry
The Institute of Medicine (IOM) added its voice to the growing number of policy makers,
lawmakers, and groups calling on the medical community to strengthen conflict-of-
interest policies and broaden their disclosure of financial dealings with pharmaceutical,
biotechnology, and medical device firms.

IOM released a report April 28, 2009 arguing voluntary and, if necessary, regulatory
measures should be taken to reduce conflicts of interest in medical research, education,
and practice.

“It is time to end a number of long-accepted practices that create unacceptable conflicts
of interest, threaten the integrity of the medical profession and erode public trust while
providing no meaningful benefits to patients or society,” said Bernard Lo, chair of the
committee that wrote the report.

“This report spells out a strategy to protect against financial conflicts while allowing
productive relationships between the medical community and industry that contribute to
improved medical knowledge and care,” he said.

The relationships between pharmaceutical and device companies and healthcare
professionals has continued to receive intense scrutiny from enforcement agencies,
lawmakers, and the media fueled by concerns about conflicts of interest and the potential
for illegal kickbacks.

A number of groups, including the Association of American Medical Colleges, the
Pharmaceutical Research and Manufacturers of America, and AdvaMed, have pressed for
strengthening ethical standards governing vendor gift-giving and marketing practices
through adoption of voluntary codes and policies.

Senators Charles Grassley (R-IA) and Herb Kohl (D-WI) have introduced a bill (S. 301),
the Physician Payments Sunshine Act of 2009, which would establish a nationwide
standard requiring drug, device, and biologic makers to report payments to physicians to
the Department of Health and Human Services for posting online.

"It's a shot in the arm to the reform movement to have the prestige and policy heft of the
Institutes of Medicine on the side of transparency," Grassley said in an April 28, 2009

In its report, IOM acknowledges that collaborations between physicians or medical
researchers and pharmaceutical, device, and biotechnology companies does help achieve
scientific advancements that benefit the public.

At the same time, IOM notes that financial ties between medicine and industry may
create conflicts that improperly interfere with professional judgment and ultimately
negatively impact patient care.

IOM recommends, as a first step, disclosure of financial relationships with the industry in
a standardized format to help “assess the severity of conflicts and to determine whether
the relationship needs to be eliminated or actively managed.”

Congress also should create a national reporting program that requires the industry to
disclose their financial dealings with the medical community on a public website as a
means of deterring inappropriate interactions and undue influence.

The report also calls on researchers, medical school faculty, and physicians in private
practice to forgo any vendor gifts, to decline to publish or present “ghostwritten”
materials, and to limit consulting arrangements to “legitimate expert services” formalized
in contracts and paid for at a fair market rate.

In addition, physicians should limit the use of free drug samples, except for patients who
cannot otherwise afford the medications, the report says.

The report also recommends groups that develop clinical practice guidelines do not accept
direct industry funding and generally exclude individuals with conflicts of interest from
the panels that draft guidelines.

Industry support also plays too big a role in continuing medical education, the report
notes, saying an overhaul of the system is needed to eliminate “industry influence and
provide high-quality education.”

The report stresses that voluntary efforts by the industry and the medical community
would be most effective in addressing concerns but recognizes that legislative solutions
may be necessary if these efforts fall short.

Medical Research
Study Says Vioxx Clinical Trial Driven Mostly By Marketing Aims
A clinical trial conducted in 1999 to test the gastrointestinal safety of Merck & Co.’s pain
medication Vioxx was driven by the company’s marketing division and primarily intended
to help promote the drug, according to a new study published in the Annals of Internal

Merck voluntarily withdrew Vioxx from the marketplace on September 30, 2004 after a
monitoring board overseeing a long term study of the painkiller recommended that the
study be halted because of an increased risk of heart attacks and strokes.

The study was conducted by consultants to the attorneys representing plaintiffs in various
lawsuits against Merck related to the cardiovascular safety of Vioxx.

According to the authors, the study was based on Merck’s internal and external
correspondence, reports, and presentations produced by the company in the litigation.

The study focused on the ADVANTAGE trial. According to the authors, Merck’s marketing
division handled both the scientific and the marketing data, including collection, analysis,
and dissemination.

At the same time, the study said, “Merck hid the marketing nature of the trial from
participants, physician investigators, and institutional review board members.”

The authors said to their knowledge the confidential internal communications they
examined “provide the first strong documentary evidence of how a pharmaceutical
company framed a marketing effort as a clinical trial.”

So-called “seeding trials”—those designed to appear they answer a scientific question but
primarily fulfill marketing objectives—can be harmful to science and the public because
they inhibit full informed consent, compromise good research practice, and may have
little scientific merit, the authors observed.

The authors acknowledged that identifying seeding trials is challenging without access to
internal documents and even then study intent may be hard to prove.

The authors also cautioned that their findings could not be generalized to ascertain how
common such practices are among the pharmaceutical industry and that their search may
have missed some relevant information about the clinical trial’s process and purpose.

“[G]reater transparency into the clinical trial process, including public clinical trial
registration and requirements for study protocols to be included with institutional review
board submissions, may help to better illuminate this practice,” the study concluded.

Fifth Circuit Says Clinical Investigators Can Be Criminally Liable
For Violating FDA Record-Keeping Requirements
A clinical investigator may be held criminally liable for violating record-keeping
requirements under Food and Drug Administration (FDA) regulations (see 21. C.F.R. §
312.62(b)), the Fifth Circuit ruled February 6, 2009 in reversing a lower court decision.

The case involved Dr. Maria Carmen Palazzo, a psychiatrist, who was indicted by a
federal grand jury on various counts of healthcare fraud and violations of § 312.62(b),
which sets forth record-keeping requirements pursuant to 21 U.S.C. § 355(i).

In October 2000 and February 2001, Palazzo entered into contracts with SmithKline
Beechman Corporation (SKB) as a clinical investigator to carry out certain clinical studies
evaluating the efficacy and safety of Paxil in children and adolescents.

According to the opinion, Palazzo failed to comply with requirements to provide
satisfactory research records and her contracts to participate in the drug studies were

A grand jury subsequently indicted Palazzo with 40 counts of healthcare fraud and 15
counts of violating § 355(i) and § 312.62(b).

Palazzo moved to dismiss the 15 counts for failure to properly prepare and maintain
records with intent to defraud and mislead. According to Palazzo, § 355(i) only provides
criminal sanctions for manufacturers and sponsors of clinical investigational studies.

The district court granted Palazzo’s motion, dismissing the counts based on the
nondelegation doctrine, i.e. that § 355(i) did not permit the FDA to promulgate
regulations making clinical investigators criminally liable for failure to properly keep
records and report accurate information.

The Fifth Circuit reversed. The appeals court concluded the nondelegation doctrine was
not implicated in the instant case and instead examined the relevant statutory
framework, finding that clinical investigators could be subject to criminal liability for
violating the record-keeping and reporting requirements.

In so holding, the appeals court rejected the frameworks used by the Ninth and Eighth
Circuits to analyze the issue. See United States v. Smith, 740 F.2d 734 (9th Cir. 1984)
and United States v. Garfinkel, 29 F.3d 451 (8th Cir. 1994).

Palazzo conceded the FDA had authority to impose record-keeping requirements on
clinical investigators and properly did so through § 312.62, the Fifth Circuit noted.

Thus, the sole issue on appeal was whether the statutory framework allows the
imposition of criminal penalties on clinical investigators who violate § 312.62.

Answering this question in the affirmative, the Fifth Circuit noted that § 355(i) allows the
Secretary, at his or her discretion, to issue regulations regarding clinical drug testing to
“protect[] the public health.” Accordingly, the appeals court said, the FDA properly
promulgated § 312.62 pursuant to that unambiguous authority.

The appeals court then examined the broader statutory scheme under the Food, Drug,
and Cosmetics Act, which prohibits at 21 U.S.C. § 331(e) a failure to establish or
maintain any record, or make any report required under § 355(i). Penalties for violating §
331(e) are described at 21 U.S.C. § 333 and specifically provide for imprisonment for not
more than one year, a fine of not more than $1,000, or both.

“Thus, reviewing § 312.62(b) in conjunction with §§ 355(i), 331(e), and 333(a)(1) makes
it apparent that the scope of the statute allows clinical investigators to be subjected to
criminal liability,” the Fifth Circuit held.

United States v. Palazzo, No. 07-31119 (5th Cir. Feb. 6, 2009).

Obama Reverses Limits On Federal Funding For Stem Cell
President Barack Obama signed an Executive Order March 9, 2009 lifting the ban on
federal funding for embryonic stem cell research.

The move revokes the Executive Order signed by President George Bush on June 20,
2007 and the Bush Presidential statement of August 9, 2001 that limited federal funding
of research involving human embryonic stem cells.

Following the Executive Order, the National Institutes of Health (NIH) issued draft
guidelines April 17, 2009 to establish specific policies and procedures for federal funding
of embryonic stem cell research.

The draft guidelines, which are subject to 30 days of public comment, would allow
funding for research using human embryonic stem cells that were derived from embryos
created by in vitro fertilization (IVF) for reproductive purposes and were no longer
needed for that purpose.

The guidelines would prohibit funding, however, for research using human embryonic
stem cells derived from other sources, as well as for IVF embryos creased for research

The NIH draft guidelines also detail specific requirements for human embryonic stem cells
to be eligible for federal funding, including documenting that all options pertaining to use
of embryos no longer needed for reproductive purposes was explained to potential
donors; that no inducements were offered for the donation; and that there was a clear
separation between the prospective donor’s decision to create human embryos for
reproductive purposes and the donor’s decision to donate human embryos for research

In addition, researchers must obtain written informed consent from the donor.

GAO Says Vulnerabilities In IRB System Elevate Risks For Human
The Government Accountability Office (GAO) told a House panel March 26, 2009 that the
system used to review and monitor clinical trials involving human subjects is “vulnerable
to unethical manipulation” increasing the risk that experimental products are approved
for testing “with little or no substantive due diligence.”

Gregory D. Kutz, GAO’s Managing Director of Forensic Audits and Special Investigations,
appeared before the House Energy and Commerce Subcommittee on Oversight and
Investigations to present the results of a sting operation GAO devised that involved
creating a bogus medical company and approaching several institutional review boards
(IRBs) for approval to test a fictitious medical device on human subjects.

Kutz said the phony device, a post-surgical healing device for women, had fake
specifications and matched several examples of “significant risk” devices from Food and
Drug Administration (FDA) guidance.

GAO succeeded in obtaining approval from an actual IRB to test the bogus device, Kutz
reported. The two other IRBs rejected the research protocol.

According to GAO, the two IRBs that did not approve the bogus device protocol called it
“awful” and a “piece of junk,” the “riskiest thing I’ve ever seen,” and placed the odds of
approval at “zero percent.”

GAO noted a search of the FDA’s online database would have shown no evidence that
FDA ever cleared the device for marketing.

The sting operation was prompted by concerns that commercial review boards may not
always exercise effective due diligence in reviewing research protocols.

GAO performed the undercover investigation of the IRB review process at the
Subcommittee's request.

Lawmakers Slam IRB Approval

In his opening statement, Subcommittee Chairman Bart Stupak (D-NJ) said the evidence
suggested Coast IRB, LLC, which approved the phony product, “was more concerned with
its financial bottom-line than protecting the lives of patients.”

Stupak noted a coupon sent by Coast, based in Colorado Springs, CO, offering a free IRB
review so researchers could “coast through your next study.”

“GAO’s findings raise serious questions not only about the specific IRB involved in this
investigation, but with the entire system for approving experimental testing on human
beings,” Stupak said.

According to Committee Chairman Henry Waxman (D-CA), information provided by Coast
indicated that over the past five years, Coast’s board has reviewed a total of 356
proposals for human testing and approved all of them.

During this timeframe, Waxman said, “Coast’s revenues have more than doubled,
increasing from $4.4 million in 2005 to more than $9.3 million in 2008.”

Appearing before the Committee, Coast IRB CEO Daniel S. Dueber said the government
had “perpetrated an extensive fraud against my company.”

“It did so without probable cause that Coast had committed any crime. Indeed, no one at
Coast has committed any crime,” Dueber said in his written statement.

Dueber said the GAO investigation violated federal and state criminal laws, amounting
to mail fraud, wire fraud, and forging a medical license among other things. Dueber
added that Coast has asked law enforcement to investigate GAO’s actions.

Dueber said he was confident Coast would have discovered the fraud before its next
scheduled review of the trial.


Representative Diana DeGette (D-CO), Vice Chair of the Committee, introduced a bill
March 26, 2009 aimed at strengthening federal regulation and oversight of human
subjects research.

“Research is the key to innovation and discovery, including curing deadly diseases. But,
as this whole panel agrees, that research must be conducted ethically so that participants
understand the risks and make informed decisions about volunteering. That’s why we
need to upgrade our entire patient protection system in this country,” DeGette said.

DeGette has introduced the Protection for Participants in Research Act in every Congress
in the last six years.

Among other reforms, the legislation would make federal regulations applicable to all
research that is in or affects interstate commerce; strengthen the education and
monitoring of IRBs; harmonize the two major sets of federal regulations governing
research participation (i.e., the Common Rule and FDA regulations); and strengthen
protections against conflicts of interest by investigators or institutional review boards.

Bogus IRB

As part of the investigation, GAO also created a fictitious IRB that it registered with the
Department of Health and Human Services (HHS) using an online registration form. GAO
said it went on to advertise the phony IRB as “HHS approved.”

GAO said its bogus IRB received a research protocol from a real company seeking IRB
approval. “Our bogus IRB could have authorized human subjects testing to begin at this
new test site without needing to register with any federal agency, since the transaction
involved a company conducting privately funded research and did not involve any FDA-
regulated products.”

HHS also approved GAO’s application for an assurance of its fictitious medical device,
using the bogus IRB to obtain the approval. An assurance is needed for researchers to
receive federal funding from HHS for research involving human subjects testing.

Testifying at the hearing, Jerry Menikoff, the Director of HHS’ Office for Human Research
Protections (OHRP), said the institution seeking an assurance “has a responsibility to
ensure that the IRBs designated in its assurance are appropriately constituted to review
and approve human subjects research covered by the institution’s assurance.”

Menikoff also said the current registration process was developed in 2000 in response to
an HHS Office of Inspector General report raising concerns that registering with OHRP
“might become an inappropriate burden to the research process."

Menikoff explained that the registration process is designed to provide only minimal
descriptive information, such as location and contact information, to allow OHRP and the
FDA to communicate more effectively with IRBs.

Post-Hearing Developments

After the hearing, Coast IRB, LLC voluntarily agreed April 14, 2009 to suspend new
clinical trial oversight activities after the Food and Drug Administration (FDA) raised
“serious concerns” about its ability to protect human subjects.

According to an FDA announcement, Coast could continue oversight of ongoing clinical
trials, but would halt review of any new medical studies involving drugs and devices.
Coast also was prohibited from allowing any new subjects to be added to the ongoing
studies it currently was monitoring.

FDA sent a warning letter to the company indicating the IRB had violated
regulations intended to protect the rights and welfare of human research subjects in
clinical trials.

Coast IRB initially indicated a comprehensive overhaul of its policies and procedures was
underway and that it had hired a nationally recognized consulting firm to help “reinvent”
the company. It later decided, however, to cease operations entirely.

Other Developments
FDA Issues Guidance On Distribution Of Articles Discussing
Unapproved Uses Of Drugs And Devices
The Food and Drug Administration (FDA) issued a notice in the January 13, 2009 Federal
Register (74 Fed. Reg. 1694) finalizing industry guidance on "Good Reprint Practices" in
the distribution of medical or scientific journal articles and reference publications that
involve unapproved uses of FDA-approved drugs and medical devices.

Under Section 401 of the Food and Drug Administration Modernization Act, which was
passed in 1997, companies had to submit medical journal articles involving off-label uses
to the FDA before distribution.

The statute sunset on September 30, 2006 and FDA said the guidance document
represents the agency’s “current views” on the dissemination of medical journal articles
and publications that involve unapproved uses.

In the guidance document, FDA said it recognizes “the important public health and policy
justification supporting dissemination of truthful and non-misleading medical journal
articles . . . on unapproved uses of approved drugs and . . . medical devices.”

“These off-label uses or treatment regimens may be important and may even constitute a
medically recognized standard of care,” the guidance notes.

To that end, the guidance document sets forth recommended practices that, if followed,
would allow manufacturers to distribute articles and publications about off-label uses
without fear the FDA would consider such distribution as promoting the product for an
unapproved new use.

Some of the principles recommended by the draft guidance include ensuring that the
article or reference be published by an organization that has an editorial board and that
the organization should fully disclose any conflicts of interest or biases for all authors,
contributors, or editors associated with the journal article.

The guidance also states that articles should be peer-reviewed and published in
accordance with specific procedures.

In addition, the guidance recommends against distribution of special supplements or
publications that have been funded by one or more of the manufacturers of the product
in the article, and articles that are not supported by credible medical evidence are
considered false and misleading and should not be distributed.

Based on comments on the draft guidance, which was issued in February 2008, FDA says
the final document “include[s] a specific reference encouraging manufacturers to seek
approvals and clearance for new indications and intended uses for medical products.”

FDA also notes that its “legal authority to determine whether distribution of medical or
scientific information constitutes promotion of an unapproved ‘new use,’ or whether such
activities cause a product to violate the [Food Drug and Cosmetic] Act has not changed.”

In comments on the draft guidance, consumer group Public Citizen said the agency’s
decision “to once again permit the promotion of off-label uses of drugs contrasts the
current recklessness of the agency with the more consumer-protective FDA of 10 years

Lawmakers Offer Competing Legislation For Follow-On Biologics
A number of lawmakers have introduced legislation in both the House and Senate over
the last year seeking to establish a clear regulatory pathway for approving generic
versions of biotech drugs.

Biotech drugs, which are produced from living cell cultures rather than synthesized
chemically, are among the fastest growing and most expensive components of the
nation’s drug bill.

Without a statutory pathway, lawmakers have raised concerns that manufacturers of
biotech drugs, which are often prohibitively expensive and include medications used to
treat cancer, diabetes, and AIDS, can charge monopoly prices indefinitely.

Lawmakers seem to agree that FDA needs clear statutory authority for approving generic
versions of costly biotech drugs, but the period of exclusivity to afford the brand-name,
or reference product, has been the key sticking point.

The Promoting Innovation and Access to Life-Saving Medicines Act (H.R. 1427),
introduced by Representatives Henry A. Waxman (D-CA), Frank Pallone, Jr. (D-NJ),
Nathan Deal (R-GA), and Jo Ann Emerson (R-MO) would grant the original product five
years of exclusive marketing, while a modification of a previously approved product
would be entitled to three years of exclusivity.

The exclusivity periods could be extended by up to one year if the applicant establishes
that the product can be used for new disease indications or conducts pediatric studies,
according to a summary of the bill.

Senators Charles E. Schumer (D-NY), Susan Collins (R-ME), Sherrod Brown (D-OH), Mel
Martinez (R-FL), Debbie Stabenow (D-MI), and David Vitter (R-LA) introduced a similar
bill in the Senate, which also contemplates a five-year period of exclusivity.

In a press release announcing their bill this week, the Senate lawmakers said the “five-
year window” envisioned under their legislation would start from the time the brand-
name drug was first approved, not the time of the bill’s enactment.

This would mean, the lawmakers said, that generic firms would not have to wait to seek
approval to market cheaper versions of biologic drugs that have been on the market well
beyond five years.

The legislation is backed by a number of consumer and business groups including AARP,
Consumers Union, the National Business Group on Health, and the AFL-CIO.

In a statement, AARP said the bill “will ensure that consumers have greater access to
many of the biologic therapies that may be currently financially out of reach and, in doing
so, will improve the quality of life for millions of Americans."

But the Biotechnology Industry Organization (BIO) panned the proposal. While supporting
the development of a pathway for approving biosimilars, BIO argued the legislation
introduced in the House would “jeopardize[] the continued development of new
breakthrough therapies and potential cures for debilitating diseases.”

BIO instead threw its support behind a competing bill (H.R. 1548), introduced in the
House on March 17, 2009 by Representatives Anna G. Eshoo (D-CA), Jay Inslee (D-WA),
and Joe Barton (R-TX), which provides a 12-year period of exclusivity for brand-name
biotech drugs, with the potential for an additional two years for “medically significant”
new indications approved during the eight-year period following licensure of the reference

“Biotechnology can lead to cures for cancer, diabetes, and AIDS, and prevent the onset of
deadly and debilitating diseases like Alzheimer’s heart disease, and Parkinson’s,” said
Eschoo. “But we need to preserve incentives to innovate and ensure that these therapies
are safe and effective. Our bill accomplishes this.”

According to BIO, H.R. 1538 strikes the right balance between establishing a reasonable
and safe pathway to biosimilars without dampening innovation.

The Generic Pharmaceutical Association (GPhA), however, criticized the Eschoo-Inslee-
Barton bill, saying it “will only benefit brand companies by erecting barriers including an
unprecedented and unjustifiable 14 years of market exclusivity.”

Fraud and Abuse
Settlements and Jury Awards
UnitedHealth Group Agrees To $895 Million Settlement Of Public
Pension Fund’s Federal Securities Class Action
UnitedHealth Group has agreed to pay $895 million and institute certain corporate
governance reforms to resolve a federal securities class action involving the company’s
stock option grant practices, according to press releases issued by UnitedHealth and lead
plaintiff the California Public Employees’ Retirement System (CalPERS).

The agreement, which still requires the approval by the CalPERS Board of Administration,
the UnitedHealth Board of Directors, and the court, would resolve a class action filed in
July 7, 2006 in a federal district court in Minnesota.

The lawsuit, brought by public pension fund CalPERS and several other investors, alleged
discrepancies between UnitedHealth’s public statements about its profits, which were
related to stock option grants to executives.

According to CalPERS, the proposed settlement is thought to be the largest options
backdating recovery in a class action.

Under the settlement, UnitedHealth agreed to a number of corporate governance
changes, including a process for electing a shareowner-nominated director, enhanced
standards for director independence, a mandated holding period for option shares
acquired by executives, shareowner approval of any stock option re-pricing, and that
incentive compensation consider the company’s performance compared to its peer group.

The settlement does not cover UnitedHealth’s former chief executive officer or former
general counsel.

“The corporate governance reforms achieved in the settlement are a major step forward
in our broader effort to ensure that directors are responsible to shareowners, and I look
forward to presenting it in the weeks ahead to our Board for action,” said CalPERS
General Counsel Peter Mixon.

“The settlement provides UnitedHealth Group with certainty and closure on this lawsuit,
avoids potentially costly and protracted litigation and allows us to continue to focus on
providing Americans with high-quality, affordable health care solutions,” said Thomas L.
Strickland, chief legal officer of UnitedHealth Group.

UnitedHealth Group also announced a separate, proposed settlement to pay $17 million
to resolve class action litigation under the Employee Retirement Income Security Act
relating to the company’s historical stock option practices. The company did not admit
any wrongdoing as part of the proposed settlement.

Alabama Jury Finds GlaxoSmithKline, Novartis Liable For Over
$100 Million For Overcharging Medicaid, Companies Will Appeal
An Alabama jury July 1, 2009 returned a verdict finding drug makers GlaxoSmithKline
and Novartis Pharmaceutical Corporation liable for a total of $114,247,233.

Alabama Attorney General Troy King had alleged that numerous drug companies
misreported and inflated the average wholesale price (AWP) of prescription drugs leading
to massive overcharges to the Alabama Medicaid Agency.

On February 21, 2008, the first of the AWP cases to be tried resulted in a verdict of $215
million against AstaZeneca, King said.

The GlaxoSmithKline and Novartis case is the second of the AWP cases to come to trial in
the state.

Novartis and GlaxoSmithKline both said they will appeal the verdict.

Novartis said allegations were “unfounded” because the company “reported true and
accurate prices, based on terms that have been known and used by all participants in
pharmaceuticals markets, including Alabama Medicaid, for more than 30 years.”

GlaxoSmithKline also maintained that it did not misrepresent price information to the

“We have said from the beginning that GSK reported true and accurate prices to the state
of Alabama,” said Chilton Varner, an attorney with King & Spalding of Atlanta who
represented GSK.

“We believe the evidence shows the State made informed choices about how and how
much to pay Alabama pharmacists,” Varner said. “Evidence also shows that, although the
State now says it was not being fairly treated, the State has not changed the rules since
it filed the lawsuit more than three years ago.”

Amerigroup Finalizes $225 Million Settlement Of FCA Case
Amerigroup Corp. will pay $225 million to the federal government and the state of Illinois
to resolve a False Claims Act (FCA) qui tam case involving the company’s former Illinois
health plan under a final settlement agreement.

The company had unveiled a tentative settlement in July 2008, but according to a press
release posted by U.S. Attorney for the Northern District of Illinois Patrick J. Fitzgerald,
the 22-page agreement was not signed by the parties until August 13, 2008.

In October 2006, a federal jury found that Amerigroup Corp., a Medicaid health
maintenance organization, and Amerigroup Illinois Inc. violated the FCA and its state
counterpart, the Illinois Whistleblower Reward and Protection Act, by systematically
avoiding enrolling pregnant women and other individuals with expensive health conditions
while continuing to receive state and federal dollars.

A federal district court judge in March 2007 imposed civil penalties of more than $190
million against Amerigroup Illinois Inc. and its parent company, Amerigroup Corp., raising
the insurance companies’ total liability to more than $334 million.

Fitzgerald’s press release noted that the settlement replaces the judgment. In exchange,
Amerigroup agreed to dismiss its appeal of the judgment that was before the Seventh

The company admitted no wrongdoing in agreeing to the proposed settlement. “We are
concluding this litigation now to remove a source of significant legal and financial
uncertainty for our organization,” said Amerigroup’s Chairman and Chief Executive Officer
James G. Carlson.

As part of the settlement, Amerigroup also has entered into a corporate integrity
agreement (CIA) with the Department of Health and Human Services Office of Inspector

The CIA requires Amerigroup to adopt a code of conduct and policies and procedures
designed to prevent improper discrimination against federal healthcare program
beneficiaries in its marketing and enrollment practices, according to the press release.

The company also must hire an independent review organization to annually review its
marketing practices and enrollment initiatives, and its Board of Directors must annually
certify to the effectiveness of its compliance program.

Missouri Healthcare System Agrees To Pay $60 Million To Settle
FCA Case Alleging Improper Medicare Billing
CoxHealth, a nonprofit healthcare organization consisting of three hospitals and over 50
physician clinics in the Springfield, Missouri region, agreed to pay $60 million to the

federal government to resolve charges it violated the False Claims Act (FCA) by
improperly billing Medicare, according to a July 22, 2008 press release issued by the
Department of Justice (DOJ).

DOJ also alleged CoxHealth entered into prohibited financial arrangements with a
physician group and paid physicians based on their referrals to CoxHealth hospitals in
violation of the Stark and antikickback laws. The settlement also resolves claims that Cox
included non-reimbursable costs on its Medicare cost reports and improperly billed for
services provided to dialysis patients.

As part of the settlement, CoxHealth will pay $35 million immediately, followed by five
yearly payments of $5 million (plus 4% interest), the release said.

DOJ emphasized the settlement amount of $60 million was a compromise, and was
“considerably less that the alleged improper Medicare payment to Cox.”

This amount took into account CoxHealth’s ability to pay with an underlying objective of
allowing CoxHealth to continue operating as a healthcare system, according to DOJ.

“The government began its settlement negotiations by taking the position that Cox
should repay every claim the government alleges we improperly billed to Medicare . . .
[which] exceeded the amount Cox could pay,” commented John Squires, Chairman of
CoxHealth’s Board of Directors, in a press release.

“Given the magnitude of the repayment if we were to go to trial and lose, which is always
a possibility with jury trials, we negotiated with the government until we reached an
amount we could pay and still continue to fulfill our mission to serve the community now
and in the future,” Squires added.

In addition to the monetary settlement, CoxHealth has agreed to enter into a
comprehensive five-year Corporate Integrity Agreement with the U.S. Department of
Health and Human Services Office of Inspector General to ensure its continued
compliance with federal healthcare benefit program requirements.

“Because we already have a strong internal Corporate Integrity program here at
CoxHealth—which includes extensive annual compliance education—we feel very
confident that we as an organization will be able to honor this commitment,” said
CoxHealth’s President and Chief Executive Officer Robert H. Bazenson.

New York Attorney General Announces $27 Million Settlement
With Express Scripts And CIGNA In Drug-Switching Case
New York Attorney General Andrew M. Cuomo announced July 29, 2008 that Express
Scripts Inc. (ESI)—the nation’s third largest pharmacy benefit manager—along with Cigna
Life Insurance Company (CIGNA), have agreed to pay a total of $27 million as part of a
settlement of a drug-switching lawsuit brought by the state.

The lawsuit (New York v. Express Scripts Inc., No. 4669-04 (N.Y. Sup. Ct.)), filed by the
state in August 2004, alleged that, from 1998 through 2005, ESI enriched itself at the
expense of New York State Health Insurance Program’s Empire Plan and its members by
inflating the cost of generic drugs and diverting to itself millions of dollars in drug
manufacturer rebates that belonged to the Plan.

The lawsuit alleged ESI engaged in fraud and deception to induce physicians to switch a
patient’s prescription from one prescribed drug to another in order to receive a rebate

from the second drug’s manufacturer. These drug switches resulted in higher costs for
the Empire Plan and its members while simultaneously enriching ESI, according to the

The lawsuit also claimed that, as part of the scheme to divert and retain manufacturer
rebates that belonged to the Empire Plan, ESI disguised millions of dollars in rebates as
administrative fees, management fees, or fees for other professional services.

The drug-switching charges are similar to those alleged in a previous lawsuit that ESI
settled in May 2008. As part of that settlement agreement, reached between ESI and 28
states and the District of Columbia, ESI agreed to pay $9.5 million.

Under the terms of the settlement, ESI (or any other CIGNA subcontractor) must notify
individual plan members and prescribers when it has initiated a drug switch. In addition,
plan members must be advised of their right to refuse a drug switch and continue taking
their regularly prescribed drug.

In addition, the settlement prohibits ESI from soliciting drug switches when: the net drug
cost of the proposed drug exceeds the net drug cost of the originally prescribed drug; the
originally prescribed drug has a generic equivalent and the proposed drug does not; the
originally prescribed drug’s patent is expected to expire within six months; or the patient
was switched from a similar drug within the past two years.

Finally, the settlement requires ESI to make changes to increase the transparency of its
drug pricing and payment methods.

ESI said in a press release that it did “not admit any of the assertions” made in the

“Express Scripts did not conduct brand-drug therapeutic interchange programs for the
Empire Plan,” the release said. “The company also does not recommend switches to
higher-cost drugs and does not accept pharmaceutical manufacturer funding for such

ESI also said that its business practices were essentially already in compliance with the
requirements of the settlement, and that therefore “[o]nly minor adjustments” in certain
procedures would be necessary.

CIGNA released a separate statement indicating that it had agreed to make a contribution
to facilitate the settlement.

“We believed at all times, CIGNA fulfilled its obligations to the State of New York,” the
insurer said, but “[p]rolonged litigation is not in anyone’s best interest.”

Abbott Labs Pays $28 Million To Texas To Settle False Price
Reporting Charges
Texas Attorney General (AG) Greg Abbott announced September 9, 2008 a $28 million
civil settlement with Abbott Laboratories Inc., which resolves charges that the drug
manufacturer falsely reported drug prices to the state and federal Medicaid programs.

Of the $28 million in settlement funds, approximately $18 million are for damages and
$10 million will reimburse attorneys’ fees and costs, the AG said in a press release.

State and federal law requires that drug manufacturers report the prices at which they
sell their products to various providers, which is then used by the states to determine
Medicaid providers’ reimbursement for the drugs.

The difference between what a provider actually pays to purchase a drug and what is
reimbursed by Medicaid is called the “spread.”

“As a result of the illegal spreads created by Abbott Laboratories, Texas Medicaid over-
reimbursed providers for Abbott’s drugs,” the release said.

Based on information provided by industry insider Ven-a-Care of the Florida Keys Inc.,
the Texas Attorney General has reached drug-pricing scheme settlements with numerous
other pharmaceutical companies.

Recent similar settlements include: Schering-Plough/Warrick Pharmaceuticals in May
2004 ($27 million); Dey Inc. in June 2003 ($18.5 million); Boehringer Ingelheim/Roxane
Laboratories in November 2005 ($10 million); and Baxter Healthcare Corp. in June 2006
($8.5 million).

Enforcement actions against several other pharmaceutical manufacturers are pending.

Staten Island University Hospital To Pay Nearly $89 Million To
Settle Claims Of Defrauding Federal And State Healthcare
Staten Island University Hospital (SIUH) has agreed to pay a total of nearly $89 million to
settle claims that it defrauded Medicare, Medicaid, and the military’s health insurance
program, TRICARE, announced the U.S. Department of Justice (DOJ) and New York
Attorney General Andrew M. Cuomo in two separate September 15, 2008 press releases.

SIUH agreed to pay $74,032,565 to settle claims that it defrauded federal healthcare
programs, and an additional $14,883,883 to New York representing damages sustained
by the state’s Medicaid program.

The settlement resolves, in part, qui tam suits filed in the U.S. District for the Eastern
District Court of New York on behalf of the government by two individuals, Dr. Miguel
Tirado and Elizabeth M. Ryan.

Tirado, SIUH’s former Director of Chemical Dependency Services, alleged the hospital had
violated federal and state False Claims Acts (FCAs) by fraudulently billing Medicaid and
Medicare for inpatient alcohol and substance abuse detoxification treatment.

The government’s investigation in this case established that, from July 1994 through June
2000, SIUH submitted claims for detoxification treatment provided to patients in beds for
which SIUH had no certificate of operation from the state.

According to DOJ, SIUH was authorized to provide inpatient detoxification care to patients
in 56 beds, but "administered [such] treatment in 12 additional beds located in a locked,
separate wing and concealed the existence of the wing" from the state.

In the settlement approved by the district court, SIUH agreed to pay the federal
government $11,824,056 and the State of New York $14,883,883. Tirado, as the relator,
will receive $2.3 million and $2.97 million from the federal government and state
government, respectively.

Ryan, the widow of a deceased cancer patient who was treated at SIUH, initiated the
second lawsuit, alleging the hospital violated the federal FCA by fraudulently billing
Medicare for stereotactic body radiosurgery treatment that was provided on an outpatient
basis to cancer patients.

The government’s investigation in this case established that, from 1996 through 2004,
SIUH defrauded Medicare and TRICARE by knowingly using incorrect billing codes for
cancer treatment performed at the hospital, and in doing so, obtained reimbursement for
treatment that was not covered by either program.

In the settlement approved by the district court, SIUH will pay the federal government
$25,022,766, of which Ryan will receive $3.75 million, according to DOJ’s press release.

Two other claims adding significant sums to SIUH’s total settlement amount with the
federal government were resolved prior to the filing of the qui tam suits, DOJ explained.

“The United States had determined that SIUH deliberately inflated its resident count from
the 1996 cost report year through the 2003 cost report year,” and therefore received
more that its share of Medicare Graduate Medical Education reimbursement, DOJ said.

To resolve allegations pertaining to this fraudulent reporting, SIUH agreed to pay the
government $35,706,754, according to DOJ.

In addition, SIUH previously agreed to pay the federal government $1,478,989 to settle
claims relating to SIUH’s billings, from July 2003 through September 2005, to Medicare
and Medicaid for treatment of psychiatric patients in unlicensed beds.

SIUH further agreed to enter into a five-year Corporate Identity Agreement (CIA) with
the Department of Health and Human Services Office of Inspector General under which
the hospital will maintain a compliance program to help ensure against a recurrence of

Cephalon Finalizes $425 Million Settlement Of Off-Label
Marketing Allegations, Reaches $6.85 Million Deal With States
Biopharmaceutical company Cephalon, Inc. will enter a criminal plea and pay $425 million
to settle allegations that it unlawfully promoted three of its drugs for off-label uses, the
Department of Justice (DOJ) announced September 29, 2008.

Cephalon had reached a tentative deal with prosecutors in November 2007 to resolve the
off-label promotion allegations.

DOJ charged the company with one count of Distribution of Misbranded Drugs:
Inadequate Directions for Use, a misdemeanor. Under the plea agreement with the U.S.,
Cephalon will pay a $40 million criminal fine and $10 million as substitute assets to
satisfy the forfeiture obligation, DOJ said.

A separate civil settlement agreement requires Cephalon to pay $375 million, plus
interest, to resolve False Claims Act allegations made in qui tam lawsuits that Cephalon
marketed the drugs Gabitril, Actiq, and Provigil for uses not approved by the Food and
Drug Administration (FDA) in violation of the Food, Drug, and Cosmetic Act.

The four qui tam lawsuits, filed in the U.S. District Court for the Eastern District of
Pennsylvania, alleged Cephalon’s off-label marketing campaign caused false claims for

payment to be submitted to federal insurance programs like Medicare, Medicaid, and

In a statement, the company also announced separate settlement agreements with the
state Attorneys General of Connecticut and Massachusetts to resolve related
investigations into Cephalon’s marketing practices.

Under the agreement with the Connecticut Attorney General, Cephalon will pay $6.15
million, including $3.8 million to the Connecticut Department of Public Health to fund
state cancer initiatives and $200,000 to fund an electronic prescription monitoring

In addition, the company will pay $700,000 to settle an investigation with the
Massachusetts Attorney General of the Commonwealth of Massachusetts, the Cephalon
statement indicated.

According to DOJ, between 2001 and 2006 Actiq, a pain medication approved only for use
in opioid-tolerant cancer patients, was allegedly promoted to treat conditions such as
migraines, sickle cell pain crisis, and injuries.

Gabitril, approved for use as an anti-epilepsy drug, was allegedly marketed as a remedy
for anxiety, insomnia, and pain. Provigil, approved to treat excessive sleepiness from
narcolepsy, sleep apnea, and shift work sleep disorder, was allegedly promoted as a non-
stimulant drug to treat general sleepiness, tiredness, lack of energy, and fatigue, DOJ

“These are potentially harmful drugs that were being peddled as if they were, in the case
of Actiq, actual lollipops instead of a potent pain medication intended for a specific class
of patients,” said Laurie Magid, Acting U.S. Attorney for the Eastern District of

“This company subverted the very process put in place to protect the public from harm,
and put patients’ health at risk for nothing more than boosting its bottom line,” Magid

Under a five-year corporate compliance agreement (CIA) with the Department of Health
and Human Services Office of Inspector General, Cephalon must send physicians a letter
advising them of the resolution and post payments to physicians on its website. In
addition, the Cephalon’s board and top management must regularly certify the company
is in compliance with applicable requirements.

“We believe our existing compliance policies and procedures already address the majority
of the requirements outlined in the CIA and that the strong compliance infrastructure now
in place has improved the accountability of our employees and the transparency of our
actions,” said Valli Baldassano, Cephalon Executive Vice President and Chief Compliance

Walgreens Pays $9.9 Billion To Settle Charges Of Medicaid
Retail pharmacy chain Walgreens has paid the federal government and four states $9.9
million to resolve allegations it falsely billed Medicaid for prescription drugs dispensed to
persons covered by both Medicaid and private third-party insurers, the Department of
Justice (DOJ) announced September 29, 2008.

According to DOJ, Walgreens allegedly charged the four state Medicaid programs the
difference between what the private insurance companies paid for the drugs and what the
state Medicaid programs would have paid for the drugs in the absence of private

The government contended the drug chain was entitled to reimbursement from the
Medicaid programs only for the amount the Medicaid beneficiary would have been
obligated to pay the pharmacy had the claims been submitted solely to the private
insurers, generally the co-payment amount.

The government investigation was prompted by a qui tam action under the False Claims
Act brought by two Walgreens pharmacists. The two relators will share over $1.4 million
as a portion of the recovery, the release said.

Eli Lilly Agrees To Multi-State Settlement Of $62 Million To
Resolve Off-Label Marketing Charges
Pharmaceutical manufacturer Eli Lilly and Company has agreed to pay a record $62
million multi-state settlement to resolve charges of improper marketing for off-label uses
of the antipsychotic drug Zyprexa.

According to California Attorney General Edmund G. Brown Jr., the settlement is the
largest ever multi-state consumer protection-based pharmaceutical settlement. Brown
noted in an October 7, 2008 press release that California will receive $5.6 million, the
largest share of the award.

The attorneys general of the 32 states involved in the settlement had alleged that Eli Lilly
engaged in unfair and deceptive practices when it marketed Zyprexa for off-label uses
and failed to adequately disclose the drug’s potential side effects to healthcare providers.

According to Brown, beginning in 2001 Eli Lilly launched an aggressive marketing
campaign that pushed Zyprexa for off-label uses including pediatric care, high-dosage
treatment, treatment of symptoms rather than diagnosed conditions, and treatment of
elderly patients suffering from dementia.

Under the terms of the settlement, the drug company has agreed, among other things,
to: refrain from making any false, misleading, or deceptive claims regarding Zyprexa;
require its medical staff, rather than its marketing staff, to have ultimate responsibility
for developing and approving content for all medical letters and references regarding
Zyprexa; provide specific, accurate, objective, and scientifically balanced responses to
unsolicited requests for off-label information from a healthcare provider regarding
Zyprexa; contractually require continuing medical education providers to disclose Eli
Lilly’s financial support of their programs and any financial relationship with faculty and
speakers; and provide a list of healthcare provider promotional speakers and consultants
who were paid more than $100 for promotional speaking and/or consulting by Eli Lilly.

Robert A. Armitage, Eli Lilly's senior vice president and general counsel, noted in a
statement that “there is no finding that Lilly has violated any provision of the state laws
under which the investigations were conducted.”

"Lilly's policies and practices already mirror most of the provisions included in the
proposed consent decrees. This resolution reflects our commitment to continually build on
a foundation of compliance, accuracy and transparency," Armitage said.

The 32 states participating in the agreement are Alabama, Arizona, California, Delaware,
Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts,
Michigan, Missouri, Nebraska, Nevada, New Jersey, New York, North Carolina, North
Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee,
Texas, Vermont, Washington and Wisconsin, as well as the District of Columbia.

Bayer Agrees To Pay U.S. $97.5 Million To Resolve Kickback
Bayer HealthCare LLC (Bayer) agreed to pay the United States $97.5 million plus interest
to settle allegations that it paid kickbacks to 11 diabetic suppliers and caused those
suppliers to submit false claims to Medicare, according to a Department of Justice (DOJ)

The DOJ said November 25, 2008 the settlement resolves allegations that Bayer engaged
in a cash-for-patient scheme through which the company paid the diabetic suppliers to
convert their patients to Bayer’s products from supplies manufactured by its competitors.

Under the terms of the settlement, Bayer agreed to enter into a corporate integrity
agreement with the Department of Health and Human Services Office of Inspector

Bayer noted in a statement that the company "has cooperated fully with the DOJ’s civil
investigation that commenced in 2003, without acknowledging liability."

According to Bayer, its "compliance processes have undergone continuous improvement
in all areas of the company in the past years. In addition, employees receive regular
training in order to promote understanding and compliance" with federal law.

McKesson Announces $350 Million Settlement On Private Party
AWP Litigation
McKesson Corporation announced November 21, 2008 that it has agreed to a $350
million settlement to resolve allegations that it conspired with publishing company First
DataBank to inflate the average wholesale price (AWP) of its pharmaceuticals.

According to the company's press release, McKesson "will also record a reserve for
outstanding and expected future AWP-related claims by public entities, which is currently
estimated to be $143 million."

The settlement terms include an express denial of liability of any kind, McKesson noted.

“As we have consistently stated, we believe the plaintiffs’ allegations are without merit,
and that McKesson adhered to all applicable laws,” said John H. Hammergren, McKesson
chairman and chief executive officer. “Yet when faced with the inherent uncertainty of
this litigation, we determined that entering into the settlement agreement was in the best
interest of our shareholders, customers, suppliers, and employees.”

Illinois Hospital To Pay $36 Million Following Voluntary
Disclosure Of Improper Payments
Condell Health Network, the parent corporation of Condell Medical Center, agreed to pay
$36 million to the federal government and state of Illinois following its voluntarily

disclosure that it received improper Medicare and Medicaid payments for roughly five
years, U.S. Attorney for the Northern District of Illinois Patrick J. Fitzgerald announced
December 1, 2008.

Condell brought the improper payments involving the 283-bed medical center, based in
Libertyville, IL, to the government’s attention while in the process of being acquired by
Advocate Health Care. The acquisition was scheduled to be completed December 1.

The improper practices, according to Fitzgerald, stemmed from Condell’s relationship with
its physicians from 2002 through 2007—specifically, leases of medical office space at
rates below fair market value, improper loans to physicians, and hospital reimbursement
to physicians who performed patient services without written agreements.

“By voluntarily disclosing these improper practices, Condell avoided a Government
lawsuit under the federal False Claims Act and was able to negotiate a settlement at a
discount,” the release said.

Under the settlement agreement, Condell will pay the federal government $33.12 million
to resolve claims relating to Medicare and $2.88 million to Illinois regarding Medicaid.

Condell admitted no liability in agreeing to the settlement.

“We commend Condell for bringing these practices to our attention. We expect health
care providers to come forward when they discover issues that could rise to the level of
fraud without waiting for us to catch up to them, and when they do so, they may well
benefit,” Fitzgerald said.

Eli Lilly To Pay $1.415 Billion In Landmark Settlement Of Zyprexa
Off-Label Promotion Allegations
Eli Lilly and Company has agreed to pay $1.415 billion to settle criminal and civil
allegations that the drug maker illegally marketed its antipsychotic drug Zyprexa
(olanzapine) for unapproved uses, the Department of Justice (DOJ) announced January
15, 2009.

Under the settlement, Eli Lilly agreed to plead guilty to a misdemeanor charge of
misbranding in violation of the Food, Drug, and Cosmetic Act, pay a $515 million criminal
fine, and forfeit assets of $100 million.

According to DOJ, the criminal fine is the largest “for an individual corporation ever
imposed in a United States criminal prosecution of any kind.”

“We deeply regret the past actions covered by the misdemeanor plea,” said Eli Lilly
Chairman, President, and Chief Executive Officer John C. Lechleiter, Ph.D. in a statement.

The company also will pay up to $800 million to the federal government and the states to
resolve civil allegations originally brought in four separate lawsuits under the qui tam
provisions of the False Claims Act.

The federal government will receive $438 million of the civil settlement, while the states
that participate will share up to $361 million. Relators in the case will receive $78.8
million from the federal share.

Eli Lilly did not agree with or admit the civil allegations.

The Food and Drug Administration (FDA) has approved the blockbuster drug Zyprexa for
use in treating schizophrenia and bipolar mania.

But according to the government’s criminal information, filed in the U.S. District Court for
the Eastern District of Pennsylvania, from September 1999 through at least November
2003 Eli Lilly promoted Zyprexa for various other treatments, including for dementia or
Alzheimer’s dementia, which are uses not approved by the FDA.

The information also alleged that Eli Lilly executives began in October 2000 an off-label
marketing campaign targeting primary care physicians, even while the company knew
there was virtually no approved use for Zyprexa in the primary care market.

The qui tam lawsuits claimed that between September 1999 and the end of 2005, Eli Lilly
illegally promoted Zyprexa and caused false claims for payment to be submitted to
federal healthcare programs for these off-label uses.

Eli Lilly also entered into a five-year corporate integrity agreement (CIA) with the
Department of Health and Human Services Office of Inspector General.

In October 2008, the pharmaceutical giant agreed to a record $62 million, multi-state
settlement to resolve various consumer protection lawsuits concerning its marketing of

In a statement, Eli Lilly said the company cooperated with the government’s investigation
and has “a comprehensive compliance program that is designed to ensure [its] global
business practices fully comply with laws and regulations.”

Hospice Company To Pay $24.7 Million To Settle FCA Claims
Alabama-based SouthernCare Inc. has agreed to pay the federal government $24.7
million to settle allegations it submitted false claims to Medicare for beneficiaries who
were not eligible for hospice care, the Department of Justice (DOJ) announced January
15, 2009.

Medicare beneficiaries are entitled to hospice care if they have decided to forego curative
treatment of their illness and have a terminal prognosis of six months or less to live.

Two former SouthernCare employees initiated a whistleblower action under the False
Claims Act (FCA) against the hospice company. They will receive $4.9 million from the
settlement proceeds.

“Our investigation showed a pattern and practice to falsely admit patients to hospice care
who did not qualify and to bill Medicare for that care,” said U.S. Attorney for the Northern
District of Alabama Alice H. Martin.

As part of the settlement, SouthernCare also will enter into a five-year corporate integrity
agreement with the Department of Health and Human Services Office of Inspector

SouthernCare admitted no liability in agreeing to the settlement.

“We are pleased to put this matter to rest so we can focus on what we do best—serving
patients and families with compassion and dignity—rather than remain tangled in
protracted legal issues,” said SouthernCare President and Chief Executive Officer Michael
J. Pardy in a statement.

Wisconsin Jury Finds Pharmacia Committed Medicaid Fraud,
Must Reimburse State $9 Million
Wisconsin Attorney General J. B. Van Hollen announced February 17, 2009 that a jury
found pharmaceutical manufacturer Pharmacia had violated the state Medicaid fraud law
1,440,000 times by reporting grossly inflated and fraudulent prices to the state Medicaid

After a two-week trial in a case brought by the Wisconsin Department of Justice, the jury
found Pharmacia should pay $9 million to compensate the state for its monetary losses,
according to a press release issued by Van Hollen.

Under Wisconsin's Medicaid fraud forfeiture statute, the court may award a minimum of
$100 per violation up to a maximum of $15,000 per violation, the release said. A
dispositional hearing will be scheduled to determine the forfeiture amount.

The Wisconsin Department of Justice has filed similar claims against 35 other
pharmaceutical manufacturers, Van Hollen said. Three of the manufacturers already have
settled with the state, agreeing to pay over $3 million to resolve the claims.

Jury Orders Sandoz To Pay State Almost $80 Million In AWP
A Montgomery, Alabama jury found February 24, 2009 drug manufacturer Sandoz
Pharmaceuticals, Inc. guilty of Medicaid fraud and ordered the company to pay $78.4
million in damages to the state.

According to a press release posted by Beasley Allen, the law firm that represent the
state of Alabama in its suit against a total of 72 pharmaceutical companies in Average
Wholesale Price (AWP) litigation, the total fine imposed on Sandoz includes $28.4 million
in compensatory damages and $50 million in punitive damages.

The drug companies have been accused of reporting false prices to the state and this
particular verdict “is significant because German-based Sandoz, a subsidiary of Novartis,
manufactures and markets generic drugs,” the release said.

"The fact that a generic drug is cheaper than a brand did not give Sandoz the right to
cheat the state out of $28 million," Jere L. Beasley said, adding that "Sandoz knowingly
reported false prices to the state."

According to the release, Sandoz is the fourth company to go to trial. In the first trial in
February 2008, a jury awarded Alabama a $215 million verdict against AstraZeneca PLC.
The second trial resulted in a $114 million verdict in favor of the state against
GlaxoSmithKline and Novartis in July 2008.

Settlements have been reached with seven other companies and negotiations are
ongoing with a number of others, the release noted.

Court Approves Settlements Of Lawsuits Alleging Companies
Fraudulently Marked Up Drug Prices
A federal district court in Massachusetts approved March 17, 2009 settlements of class
actions alleging drug wholesalers First DataBank, Inc. (FDB) and Medi-Span engaged in a

scheme with drug pricing publisher McKesson Corporation to fraudulently “mark up” the
average wholesale price (AWP) for numerous prescription drugs.

U.S. District Court for the District of Massachusetts Judge Patti B. Saris found the
amended settlements, which require among other things that FDB and Medi-Span pay
$2.7 million into a settlement fund for class members (third-party payors (TPPs) and
consumers), “fair, reasonable and adequate.”

The settlement also calls for rolling back the wholesale average cost (WAC) to AWP mark-
up from 1.25 to 1.20 for 1,442 branded drugs.

Judge Saris did modify, however, the settlement agreement to extend from 90 days to
six months the effective date to make the price adjustments so as “to alleviate the
impact on independent and rural pharmacies.”

Judge Saris had rejected an earlier proposed settlement based on concerns that it
provided only prospective relief with no money for consumers or TPPs. Saris also cited
objections from pharmacy groups and other third parties that the initial proposal called
for rolling back over 8,000 National Drug Codes (NCDs) for branded drugs, not just those
1,442 NCDs affected by the fraud.

“[B]ecause of FDB’s limited finances and questionable insurance coverage, the $2.7
million cash payment, combined with the AWP rollback provisions constitutes a
reasonable settlement of the claims,” Saris wrote.

Despite the modifications to the earlier proposal, the National Association of Chain Drug
Stores (NACDS) argued the settlement approved by the court would “unfairly hurt retail

“The AWP reductions will cut Medicaid reimbursement by about $68 million each year. In
addition, pharmacies that are unable to renegotiate their private sector reimbursement
contracts will face a net 4 percent reduction in AWP-based reimbursement,” NACDS said.

NACDS added that it is considering “next steps regarding the ruling and will determine
the course of action that best represents pharmacy for the benefit of the patients.”

Responding to NACDS' objections, Saris said in the order that “after eight years of this
[multi-district litigation], rolling back AWPs or phasing them out as a pricing benchmark
is in the public interest and to the benefit of the class.”

Moreover, Saris said many retail drug chains already had renegotiated their
reimbursement contracts with pharmacies and were on notice for two years that a
rollback was likely.

“None of the pharmacies protested the windfalls they received when prices were
unilaterally inflated by five percent,” Saris commented.

At issue in the litigation was the so-called “spread,” i.e., the difference between WAC—
what the retailers pay to acquire drugs—and the AWP—what consumers and TPPs pay to
retailers for the drugs.

The lawsuit alleged that in late 2001, McKesson and FDB entered into a “secret
agreement” on how the WAC to AWP markup would be established for hundreds of brand-
name drugs. Specifically, McKesson and FDB raised the WAC to AWP spread from 20% to

25% for over 400 drugs that previously had received only the 20% markup, according to
the lawsuit.

As a result of this artificial increase in the markup of the WAC to AWP spread from 20%
to 25%, thousands of TPPs, public entities, and consumers paid increased drug prices,
plaintiffs contended.

In November 2008, McKesson Corporation agreed to a $350 million settlement to resolve
allegations that it conspired with FDB to inflate the AWP of its pharmaceuticals.

New England Carpenters Health Benefits Fund v. First Databank, Inc., No. 05-11148-PBS
and District Council 37 Health and Security Plan v. Medi-Span, No. 07.10988-PBS (D.
Mass. Mar. 17, 2009).

* NACDS and the Food Marketing Institute (FMI) announced April 29 that they are
appealing to the First Circuit the court’s approval of the settlements.

Quest Diagnostics To Pay $302 Million To Resolve Allegations
That Subsidiary Sold Misbranded Test Kits
The U.S. Department of Justice (DOJ) announced April 15, 2009 that Quest Diagnostics
Incorporated (Quest) and its subsidiary, Nichols Institute Diagnostics (NID), have entered
into a $302 million global settlement with the federal government to resolve criminal and
civil claims that NID knowingly manufactured, marketed, and sold various test kits that
produced materially inaccurate and unreliable results.

“In order to safeguard public health, and when appropriate, to recover taxpayer dollars,
the government will vigorously investigate allegations that a manufacturer knowingly sold
medical devices, such as test kits, that were materially unreliable or provided significantly
inaccurate results,” commented U.S. Attorney for the Eastern District of New York Benton
J. Campbell.

As part of the settlement, NID pled guilty to a felony misbranding charge in violation of
the Food, Drug, and Cosmetic Act, 21 U.S.C. §§ 301 et seq. The charge relates to NID’s
Nichols Advantage Chemiluminescence Intact Parathyroid Hormone Immunoassay
(Advantage Intact PTH Assay), a test used to measure parathyroid hormone (PTH)
levels in patients.

In its guilty plea, NID admitted that, over approximately a six-year period commencing
in May 2000, it knowingly caused the introduction into interstate commerce the
Advantage Intact PTH Assay, which was misbranded within the meaning of 21 U.S.C. §

NID further agreed to pay a criminal fine of $40 million and enter into a non-
prosecution agreement with the federal government, according to DOJ’s press release.

Quest and NID also entered into a civil settlement agreement with the federal
government under which Quest will pay $262 million to resolve federal False Claims Act
(FCA) allegations relating to the Advantage Intact PTH assay, as well as other assays
manufactured by NID that allegedly provided inaccurate and unreliable results.

Federal and state governments undertook civil and criminal investigations in the case
after a whistleblower filed a qui tam complaint in the Eastern District of New York,
alleging that the Advantage Intact PTH Assay and another widely used PTH assay
manufactured by NID, the Bio-Intact PTH Assay, provided elevated results. According to

the release, the whistleblower will share in the FCA recovery and receive approximately
$45 million.

The civil settlement resolves allegations that, over the same six-year period, NID
manufactured, marketed, and sold the Intact PTH, the Bio-Intact PTH test kits, and
certain other test kits despite knowing these kits produced results that were inaccurate
and unreliable. As a result, the civil settlement alleges, clinical laboratories that
purchased and used the test kits at issue submitted false claims for reimbursement to
federal health programs.

In addition, Quest agreed to pay various state Medicaid programs approximately $6.2
million to resolve similar civil claims, and to enter into a Corporate Integrity Agreement
with the U.S. Department of Health and Human Services Office of Inspector General.

In a statement, Quest said "[w]hile the company disagrees with and does not admit to
the government's civil allegations, it agreed to the settlement to put the matter behind

New York AG Announces $35 Million Settlement With Healthfirst
On Charges Of Violating Medicaid Managed Care Contract
New York Attorney General (AG) Andrew M. Cuomo announced September 3, 2008 a $35
million settlement with Healthfirst, the largest Medicaid managed care provider operating
in the state, to resolve allegations the company violated its contract by paying bonuses
and other compensation incentives to its marketing representatives based on

In May 2008, Healthfirst’s former Executive Vice President (EVP) and Chief Operating
Officer (COO) James Booth was indicted on charges of enrollment fraud and insurance
fraud for causing Healthfirst to submit false marketing plans to the state and to local
government agencies that concealed the company's improper compensation practices,
according to the AG's press release.

“Medicaid providers engaged in prohibited compensation practices are committing an act
of fraud against New York’s taxpayers,” Cuomo commented. “Marketing reps must not
engage in a numbers game that could result in ineligible persons being enrolled in the
Medicaid program and cost[ing] taxpayers more money.”

The AG's office said an ongoing investigation uncovered the alleged improper
compensation practices, which occurred with enrollments in 1999 through September
2003. During the course of the investigation, Healthfirst cooperated with the AG’s office
and disclosed certain information concerning the improper compensation practices and
enrollment fraud committed by certain former marketing representatives, the release

In addition, both EVP/COO Boothe and Healthfirst’s President and Chief Executive Officer,
Paul Dickstein, resigned from their positions in late 2007.

Under new leadership, Healthfirst is undertaking an extensive review of past and current
practices to ensure that it fully complies with its contractual obligations, according to the
release. “Healthfirst’s new management is rightfully taking responsibility and correcting
the mistakes of the past,” Cuomo said.

Criminal Law

Seventh Circuit Vacates Individual’s Out-Of-Guidelines Sentence
For Medicaid Fraud
The Seventh Circuit vacated July 9, 2008 a 60-month prison sentence of a small business
owner for Medicaid fraud, finding the judge’s substantial departure from the federal
Sentencing Guidelines unjustified.

Defendant William Higdon, who at age 23 took over his mother’s small business
transporting Medicaid patients to and from medical facilities, pleaded guilty under 18
U.S.C. § 1347 to defrauding the Indiana Medicaid program of $294,000.

The Sentencing Guidelines range was 18 to 24 months in prison. Although the prosecutor
recommended that defendant be sentenced within the guidelines range, the district court
judge imposed a 60-month sentence. Defendant appealed the prison sentence.

The appeals court noted at the outset that, while United States v Booker, 125 S. Ct. 747
(2005), made the sentencing guidelines advisory rather than mandatory, “an individual
judge should think long and hard before substituting his personal philosophy for that of
the [Sentencing] Commission.”

Here, the Seventh Circuit found the sentencing transcript “laced with apparent mistakes
and misunderstandings by the district judge that may have been decisive in his imposing
a sentence almost three times the length of the midpoint of the guidelines range (60
months versus 21 months).”

For example, according to the Seventh Circuit, the district court judge appeared to base
the upward variance on the belief that Medicaid fraud is more serious than other fraud
because it involves the government and the poor.

But the appeals court found “no suggestion that without prison sentences above the
applicable guidelines range, fraud against the Medicaid program will reach a point at
which benefits have to be cut.”

Although the record indicated that the defendant was remorseful and would not commit
another crime, the judge apparently ignored this factor believing that a longer sentence
would enable him to obtain “needed educational, vocational training, medical care or
other correctional treatment.”

But the judge failed to provide a rationale why a guidelines sentence would not be long
enough “to enable the defendant to reap whatever benefits one might expect from living
in a federal prison,” nor did the judge consider 18 U.S.C. § 3582(a), which requires a
court to recognize that “imprisonment is not an appropriate means of promoting
correction and rehabilitation.”

The appeals court also noted that the fraud involved was a “garden-variety” case of
overbilling and not such a great amount as to warrant the out-of-guidelines sentence.

“[D]efendant would have had to steal $20 million for a sentence of 60 months to be
within the guidelines range,” the appeals court observed.

Finally, the judge did not point to any other sentences he imposed in cases under § 1347
to support his contention that the 60-month prison term was necessary to avoid sentence

“We suggest that when a judge decides to impose an out-of-guidelines sentence . . . he
write out his reasons rather than relying entirely on the transcript of his oral remarks to
inform the reviewing court of his grounds,” the appeals court concluded.

United States v. Higdon, No. 07-3951 (7th Cir. July 9, 2008).

DOJ Revisions To Charging Guidelines For Corporate Fraud
Focus On Cooperation Credit, Compliance Programs
The Department of Justice (DOJ) issued August 28, 2008 revised guidelines that federal
prosecutors must abide by in charging decisions concerning corporate criminal cases.

The revised Principles of Federal Prosecution of Business Organizations, announced by
Deputy Attorney General Mark R. Filip, will be committed for the first time to the U.S.
Attorneys Manual, which is binding on all federal prosecutors, DOJ said.

The guidelines in particular focus on what factors prosecutors can take into account when
considering whether a corporation has cooperated with the government—i.e. cooperation

The guidelines explicitly state that credit for cooperation will not depend on the
corporation’s waiver of attorney-client privilege or work product protection, but rather on
the disclosure of relevant facts.

The new guidelines forbid federal prosecutors from requesting disclosure of non-factual
attorney-client privileged communications and work product except where an advice-of-
counsel defense has been asserted and with respect to communications between a
corporation and corporate counsel that are made in furtherance of a crime or fraud.

Concerns about the Department’s stance on privilege waiver stem from the Thompson
Memorandum, which was issued in 2003 by then-U.S. Deputy Attorney General Larry D.

The Thompson Memorandum outlined nine factors for DOJ prosecutors to consider in
deciding whether to bring criminal charges against a company, including the
government’s willingness to cooperate in the investigation. This factor stated cooperation
could include, “if necessary, the waiver of corporate attorney-client and work product

The defense bar and others in the legal community have long argued that this
policy posed significant ethical concerns.

These concerns prompted then-U.S. Deputy Attorney General Paul J. McNulty to issue the
so-called “McNulty Memorandum” in December 2006, which placed new restrictions on
federal prosecutors that seek privileged information from companies under corporate
charging guidelines.

The newly revised principles, which supersede the previous memoranda, also instruct
prosecutors not to consider a corporation’s advancement of attorneys’ fees to employees
when evaluating cooperativeness and make clear that participating in a joint defense
agreement does not by itself render a corporation ineligible for cooperation credit.

Another change included in the guidelines bars prosecutors from considering whether a
corporation has sanctioned or retained culpable employees in evaluating cooperation

The guidelines also include a section on corporate compliance programs.

“While the Department recognizes that no compliance program can ever prevent all
criminal activity by a corporation’s employees, the critical factors in evaluating any
program are whether the program is adequately designed for maximum effectiveness in
preventing or detecting wrongdoing by employees and whether corporate management is
enforcing the program or is tacitly encouraging or pressuring employees to engage in
misconduct to achieve business objectives,” the guidelines state.

The guidelines note that in evaluating compliance programs, prosecutors “may consider
whether the corporation has established corporate governance mechanisms that can
effectively detect and prevent misconduct.”

“The changes that the Department announces today are in keeping with the long-
standing tradition of refining the Department’s policy guidance in light of lessons learned
from our prosecutors, as well as comments from others in the criminal justice system,
the judiciary, and the broader legal community,” said Flip in a statement.

False Claims Act
U.S. Supreme Court Holds FCA Requires Intent To Defraud
The U.S. Supreme Court unanimously held June 9, 2008 that the False Claims Act (FCA)
requires proof the defendant “intended that the false statement be material to the
Government’s decision to pay or approve the false claim.”

The opinion, authored by Justice Samuel Alito, reversed a Sixth Circuit decision that held
it was sufficient under the FCA for a plaintiff to prove merely that a false statement
resulted in payment from the government.

According to the Court, “the Sixth Circuit’s interpretation of § 3729(a)(2) [of the FCA]
impermissibly deviates from the statute’s language, which requires the defendant to
make a false statement ‘to get’ a false or fraudulent claim ‘paid or approved by the

Thus, a defendant must intend for the government to pay the claim, the Court held.

“Eliminating this element of intent would expand the FCA well beyond its intended role of
combating “fraud against the Government,’” Alito wrote.

Allison Engine Co. v. United States ex rel. Sanders, No. 07-214 (U.S. June 9, 2008).

Fifth Circuit Dismisses Qui Tam Suit Finding Relators Not
Original Source Of Alleged Fraud
A federal district court properly dismissed a False Claims Act (FCA) qui tam suit alleging
Tenet Healthcare Corporation (Tenet) made false claims for outlier medical benefits
against Medicare based on its conclusion that the relators did not qualify as original
sources of the information underlying the alleged fraud, the Fifth Circuit ruled July 22,

The appeals court affirmed summary judgment in Tenet’s favor, agreeing with its
argument that relators lacked direct and independent knowledge of information that
would have qualified them as original sources, thereby allowing them to avoid the public
disclosure bar, 31 U.S.C. § 3730(e)(4)(A).

The relators in the case, Man Tai Lam and William Meshel, filed their qui tam suit in
November 2002, alleging Tenet improperly manipulated Medicare’s outlier payment
system by artificially inflating charges at two hospitals located in El Paso, Texas.

Prior to August 2003, CMS regulations allowed outlier payments when a hospital’s
charges multiplied by the hospital’s ratio of costs to charges in its most recent settled
cost report, exceed a certain threshold, the appeals court explained.

The relators’ qui tam suit alleged that, under these regulations, Tenet allegedly
manipulated the system when its real costs did not increase in proportion to the charge
increases, and even declined. As a result, Tenet was allegedly able to qualify more
patients as outlier patients and receive reimbursements that it was not entitled to,
according to the appeals court.

After the qui tam suit was filed in 2002, it remained under seal until July 2005 when the
government declined to intervene in the case.

Five months later, relators filed their third amended complaint, which alleged Tenet
artificially inflated its “cost-to-charge” ratio to obtain more than its proper share of funds
from the Medicare/Medicaid outlier system. That complaint also alleged Tenet offered
medical directorships and office-expense reimbursements as kickbacks to induce
physicians to refer their patients to Tenet hospitals.

Tenet moved to dismiss, and while the motion was pending, the federal government
settled with Tenet for claims relating to 165 hospitals nationwide, including the two El
Paso hospitals.

In August 2006, the district court dismissed the relators’ kickback claims, but denied the
motion with regard to their outlier claims.

Finding the information concerning the “outlier manipulation theory" was publicly
disclosed in a publication called the Weekly Report prior to the relators filing their qui tam
suit, the district court said relators could bring their qui tam suit only if they were the
“original source” of the information underlying the outlier claims.

Nearly a year later, the federal government and Tenet moved for summary judgment on
the issue of relators’ status as original sources. In response to the motion, relators
appended two declarations to substantiate their knowledge of Tenet’s costs and
increasing charges over the time period at issue.

The district court granted the motion, finding relators could not be found to “have had
direct and independent knowledge of the information on which the allegations are based.”

“At no point do relators allege or prove knowledge of whether Tenet’s charges were
rising, whether Tenet was artificially raising its charges, whether the charges were rising
in relation to the hospital’s costs, and whether Tenet had knowledge that the claims it
submitted were false—all of which are necessary components in a claim of outlier fraud,”
the district court said.

Affirming, the Fifth Circuit found the evidence presented in the relators’ declaration fell
short to qualify them as original sources.

The relators’ information about rising charges at Tenet hospitals came primarily from
patient complaints, the appeals court noted. Moreover, the relators’ information on the
cost side was similarly indirect.

Ultimately, the Fifth Circuit concluded the relators’ knowledge was not the type of first-
hand, insider knowledge that was required to satisfy the original source standard.

United States ex rel. Lam v. Tenet Healthcare Corp., No. 07-51042 (5th Cir. July 22,

U.S. Court In D.C. Refuses To Dismiss FCA Action Against
Diabetes Treatment Center, But Rejects Stark Law Claims
The U.S. District Court for the District of Columbia refused July 21, 2008 to grant
defendant Diabetes Treatment Centers of America (DTCA), a former business of
Healthways, Inc., summary judgment on most of the claims against it in the long-running
qui tam action dating back to 1994.

The court found relator A. Scott Pogue had raised a genuine issue of material fact on his
claims that DTCA caused false Medicare and Medicaid claims to be submitted in violation
of the False Claims Act (FCA) and Anti-Kickback Statute (AKS) to survive summary

The court did find, however, that relator failed to produce evidence to show a violation of
the Stark Law.

In the case, which was transferred to the federal district court in the District of Columbia
as part of a multi-district litigation, relator claimed DTCA was involved in a kickback
scheme for physicians to refer patients to diabetes treatment centers located in various
hospitals with which it had contracts.

At the center of the allegations was the relationship between DTCA and its medical
director-physicians. According to relator, DTCA’s compensation to the medical directors
was well above fair market value and intended to induce referrals to the centers in
violation of the AKS and Stark Law.

The district court criticized DTCA for once again arguing violations of the AKS and Stark
Law could not support an FCA action, pointing to “two adverse rulings” on this issue in
the instant litigation alone as well as “legion other cases” recognizing an “implied
certification theory” of FCA liability.

The court also found relator had presented more than enough evidence to proceed to the
jury with his claim that DTCA violated the AKS by remunerating physicians with a
purpose to induce referrals.

Specifically, the court pointed to a consultant report submitted by the relator showing
that DTCA paid its medical directors fees far in excess of the fair market value
commensurate with their duties.

Moreover, the “very foundation of DTCA’s business model was built chiefly on concerns of
census—the number of patients treated on a particular day.”

The need for medical director referrals was great, the opinion explained, because DTCA’s
contracts with hospital customers based DTCA’s remuneration on the number of
discharges or Medicare patient days.

The court also rejected DTCA’s argument that it lacked the requisite knowledge under the
AKS because it relied in good faith on its counsel’s advice. “Relator’s evidence shows
panoplied warnings from counsel to defendant about potential violations of the AKS,” said
the court.

While the court refused to grant DTCA summary judgment on the AKS claims, it did find
the evidence insufficient to support relator’s Stark Law claim.

“In stark contrast to the mountain of evidence produced with respect to defendant’s
alleged AKS violations, relator produces almost no evidence to support a conclusion that
the hospitals contracting with defendant (i.e. ‘the entit[ies] furnishing designated health
services’) had knowledge of, or acted in reckless disregard or deliberate ignorance of,
defendant’s compensation schemes,” the court wrote in dismissing the claim.

United States ex rel. Pogue v. Diabetes Treatment Ctrs. of Am., No. 99-3298 (RCL)
(D.D.C. July 21, 2008).

Subsequent to this decision, in March 2009, Healthways announced a $40 million
settlement deal of the whistleblower lawsuit. According to the company’s announcement,
the settlement, which still requires the approval of the Department of Justice, includes a
$28 million payment to the government and an estimated $12 million for other costs and

Ben R. Leedle, Jr., Healthways Chief Executive Officer, said the settlement is not an
admission of any wrongdoing. “We continue to believe that we conducted our DTCA
business in full compliance with applicable law but ultimately concluded that the proposed
settlement is in the best interest of the Company and its shareholders.

U.S. Court In Michigan Finds Criminal Plea To Healthcare Fraud
Precludes Defendant From Denying FCA Liability
The U.S. District Court for the Eastern District of Michigan granted July 22, 2008 found an
individual who had previously pled guilty to one count of healthcare fraud was estopped
from denying civil liability under the False Claims Act (FCA).

Defendants Iftakhar U. Khan, Amjad M. Khan, Maimunah N. Khan, and Shagufta Khan
were indicted in 2003 on charges of healthcare fraud for their participation in a scheme to
defraud the government by improperly filing for and receiving Medicare reimbursements.

On October 24, 2003, the Government commenced a civil action against defendants for
presenting false claims, presenting false statements, conspiracy to defraud the
government, unjust enrichment, and money paid under mistake of fact.

Defendant Iftakhar U. Khan pled guilty to one count of healthcare fraud. The United
States then moved for partial summary judgment on its presenting false claims

The government argued defendant was liable for filing four separate false claims and
that, by virtue of his guilty plea, he was estopped from denying liability under the FCA.

The court first noted that the “preclusive effect of a guilty criminal plea on future civil
proceedings is well established” and is specifically provided for in the FCA.

After examining the evidence in the case before it, the court concluded that “Defendant is
estopped from contesting liability for all four fiscal years” at issue.

According to the court, there was “no question” that the defendant violated the FCA by
filing the false report for which he admitted liability and “[g]iven the totality of the
circumstances in this case, collateral estoppel should also apply to the false reports filed
during” the other three fiscal years at issue.

United States v. Kahn, No. 03-74300 (E.D. Mich. July 22, 2008).

Fifth Circuit Reverses Attorneys’ Fees Award To Medical Device
Company In Government’s FCA Action
In an August 19, 2008 unpublished opinion, the Fifth Circuit affirmed a lower court order
rejecting the government’s False Claims Act (FCA) and common law claims against a
durable medical equipment rental company but reversed its award of attorneys’ fees.

The case arose as a qui tam action under the FCA against Medica-Rents Co. alleging it
overbilled the Medicare program between 1993 and 1995 for its anti-bedsore device.

The government intervened and also alleged claims including unjust enrichment and
payment by mistake. The dispute stemmed from how Medica-Rents coded its anti-
bedsore device, which the government contended should have been billed under a code
that paid much less.

The U.S. District Court for the Northern District of Texas found Medica-Rents had not
fraudulently billed Medicare and therefore dismissed the FCA claims.

The district court also ordered the government to pay over $4.8 million in attorneys’ fees
to Medica-Rents after finding the government acted in bad faith in pursuing the FCA case
against the company.

The Fifth Circuit agreed with the district court that the government’s FCA action could not
stand given the “substantial confusion created by contradictory instructions and
guidance” on the coding issue provided by the government and its contractors.

The appeals court likewise affirmed the district court’s rejection of the government’s
payment by mistake claims, noting one of the government’s contractors specifically
authorized the use of the code Medica-Rents submitted for its anti-bedsore device.

The appeals court reversed, however, the award of attorneys’ fees to Medica-Rents,
disagreeing with the lower court’s assessment that the government brought claims that
were either wholly unsupported or that were easily dispatched by cursory review.

According to the appeals court, the government did have a “nonfrivolous argument
regarding which code should have been used and which entities had the authority to
issue guidance.”

Thus, the appeals court rejected the conclusion that the government’s bad faith justified
the award of attorneys’ fees.

United States v. Medica Rents Co. Ltd., No. 03-11297 (5th Cir. Aug. 19, 2008).

U.S. Court In Texas Finds Hospital’s Use Of Intergovernmental
Transfer Procedure Under State Medicaid UPL Program Did Not
Violate FCA
A private hospital that relied on an advocacy organization’s advice in claiming eligibility to
use the intergovernmental transfer (IGT) procedure for the Texas Medicaid Upper
Payment Limits (UPL) program and as a result received additional Medicaid matching
funds from the federal government did not violate the federal False Claims Act (FCA), a
district court in that state held August 25, 2008.

The U.S. District Court for the Eastern District of Texas dismissed the FCA qui tam action
alleging the hospital, East Texas Medical Center Athens (ETMCA), and its owner, hospital
conglomerate East Texas Medical Center Regional Healthcare System (East Texas)
(collectively, defendants) devised and implemented a scheme to receive additional
federal Medicaid matching funds by illegally abusing the IGT procedure under Texas’
Medicaid UPL program.

Under federal regulations, the Medicaid UPL program allows states to reimburse public
rural hospitals for certain uncompensated care provided under Medicaid at an amount
equal to what Medicare would have paid for the same services, the district court

“IGTs are used to fund, at least partially, the state’s contribution to the UPL payments,
which can be used to claim additional federal funds,” the court said. “Federal regulations
require states to separate UPLs by facility type because public hospitals are reimbursed at
a higher percentage than private non-profit hospitals.”

In this case, the defendant hospital system, East Medical, is a private nonprofit
organization and operates ETMCA in Athens, Texas. ETMCA is owned, however, by
Henderson County and leased to the Henderson County Hospital Authority (HCHA), which
then subleases the facility to East Medical.

In early 2002, the Texas Health and Human Services Commission (HHSC) solicited the
Texas Organization of Rural and Community Hospitals (TORCH)—a statewide advocacy
and leadership organization comprised of approximately 150 member hospitals located
throughout Texas—to develop Texas’ Medicaid UPL program.

Subsequently, in March 2002, TORCH notified ETMCA that it had been identified as a
“potential benefactor of significant additional funding” under the state’s UPL program.
TORCH also informed ETMCA that it was one of 27 rural hospitals that qualified under the
program as a “transferring” hospital.

At a subsequent HCHA board meeting, TORCH’s general counsel and other executives
informed ETMCA that, in order to fund IGTs, it should transfer funds to a bank account
owned by HCHA, and then those funds would be transferred to the state through an IGT.
TORCH also advised ETMCA that the funds would be matched at 128% and then
transferred back. ETMCA subsequently followed this advice in structuring several

The arrangement had been in place for some time, according to the court, when relator
Linnea Rose brought a qui tam action in June 2005 alleging ETMCA violated the federal
FCA by knowingly submitting fraudulent claims to the federal government for over $15
million of federal Medicaid matching funds.

Among other claims, Rose asserted that “to participate in the UPL program and receive
federal Medicaid matching funds, ETMCA masqueraded as a public hospital by first
transferring its operating revenue to the [HCHA]’s bank account to fund the IGTs,” the
district court said.

After the government declined to intervene in the case, the district court ordered the
complaint unsealed. East Texas moved for summary judgment, arguing that, because the
IGT transactions at issue were based on HCHA’s public proceedings, they fell within the
FCA’s public disclosure bar and therefore the court lacked jurisdiction over the case.

In an earlier opinion, the district court rejected that argument and denied East Texas’
motion. The court concluded that, in the absence of evidence showing the transactions
were discussed in extensive and ongoing proceedings HCHA conducted or that public
comment was involved, there was no “public disclosure” under the FCA.

Subsequently, defendants moved for summary judgment, arguing Rose had not raised a
genuine issue of material fact that ETMCA knowingly made a false claim to the federal

The district court this time granted defendants' motion, dismissing the case with

The central issue in dispute was whether ETMCA qualified as a "rural public hospital" and,
if so, whether that made the funds it contributed necessarily "public."

The court ultimately said it need not decide these issues, however, given that the
conflicting state of the law made both parties' interpretations reasonable. Thus, ETMCA’s
reliance on the advice of TORCH and its attorney did "not rise to the level of reckless
disregard needed for an FCA claim," the court said.

“Even though ETMCA knew that TORCH had a financial interest in establishing ETMCA’s
participation [in Texas’s Medicaid UPL program], the evidence does not suggest that
ETMCA’s reliance on that advice was reckless.”

“At most, not seeking independent counsel was negligent,” the court said, noting that this
was insufficient to assert a claim under the FCA.

United States ex rel. Rose v. East Tex. Med. Ctr. Reg'l Healthcare Sys., No. 2:05-cv-
00216-TJW (E.D. Tex. Aug. 25, 2008).

U.S. Court In Massachusetts Refuses To Dismiss Claims That
Pharmaceutical Manufacturer Violated FCA By Promoting Off-
Label Uses
The U.S. District Court for the District of Massachusetts September 18, 2008 refused to
dismiss whistleblower claims against a pharmaceutical manufacturer alleging unlawful
promotion of off-label uses for one of its drugs.

In so holding, the court found the qui tam plaintiff asserted sufficient facts to overcome a
motion to dismiss under Fed. R. Civ. P. 12(b)(6) and 9(b).

Whistleblower Dr. Peter Rost was employed by Pharmacia in June 2001 as Vice President
in charge of the Endocrine Care Unit in Peapack, New Jersey.

Pharmacia was acquired in 2003 by Pfizer, Inc. According to Rost, beginning in 1997 the
drug Genotropin, a recombinant human growth hormone, was promoted for off-label

In April 2007, Pharmacia and Pfizer pled guilty to one count of offering “kickbacks” in
connection with their outsourcing contract for the administration and distribution of

The plea agreement covered off-label uses of Genotropin in adults, but did not discuss
any off-label promotion of the drug for pediatric uses.

In June 2003, Rost brought a qui tam action against Pharmacia and Pfizer (collectively,
defendants) claiming they violated the federal False Claims Act (FCA) and state law by
unlawfully promoting the off-label use of Genotropin.

The U.S. declined to intervene in the case. Defendants moved to dismiss for lack of
subject matter jurisdiction arguing the action was barred by the FCA’s public disclosure
provision as it was “based upon” defendants’ disclosure to the government and plaintiff
was not an “original source.” Pfizer also moved to dismiss under Fed. R. Civ. P. 9(b).

The court first addressed defendants’ argument that in the amended complaint, Rost
failed to plead his FCA claims with particularity, as required under Rule 9(b).

After his first complaint was dismissed for failure to plead with particularity, Rost added
more than 200 alleged false claims that were submitted to both Medicaid and other
federal programs from citizens of Indiana, the court explained.

Rost alleged in his amended complaint that claims submitted to federal agencies for
reimbursement were for off-label, non-FDA approved uses of Genotropin such as for
“short stature” and “small for date.”

Based on these allegations, the court found the amended complaint satisfied Rule 9(b)’s
heightened pleading requirement.

The court rejected defendant’s argument that DRUGDEX—one of the compendia on which
the Medicaid program relies to determine whether to reimburse for a drug—supported the
use of Genotropin to treat “small stature” in children.

The court noted defendants had a stronger second argument that off-label claims
approved by the Drug Utilization Review Board under Indiana law were not false.

“Defendants have a compelling position that state approval undermines the assertion of a
‘false claim,’” the court said. Plaintiff also alleged, however, that the claims were false if
they were caused by unlawful kickbacks, the court noted.

Thus, if plaintiff could demonstrate the alleged financial incentives paid to physicians to
prescribe Genotropin for off-label uses were unlawful kickbacks that foreseeably caused
the submission of a false claim for federal reimbursement under the FCA, plaintiff could
prevail on his FCA claim, the court concluded.

Accordingly, the court allowed limited discovery on the kickback issue.

Lastly, the court summarily dismissed plaintiff’s claims relating to off-label uses of
Genotropin for adults.

United States ex rel. Rost v. Pfizer, Inc., No. 03-11084-PBS (D. Mass. Sept. 18, 2008).

Alleged False Certifications In Medicare Cost Reports Do Not
Constitute False Claims For Payment, Tenth Circuit Says
The Tenth Circuit upheld October 2, 2008 the dismissal of a physician’s False Claims Act
(FCA) qui tam action against a hospital, finding the hospital’s alleged false certifications
in Medicare cost reports as to its compliance with all applicable Medicare statutes and
regulations did not constitute false claims for payment under the FCA.

The appeals court agreed with the district court that the FCA “cannot be stretched” so far
as to allow a plaintiff to maintain a cause of action against a Medicare provider based on
an allegation that the provider’s certification of compliance with Medicare statutes and
regulations, contained in the annual cost report, rendered all claims submitted for
reimbursement false within the meaning of the FCA.

Plaintiff Brian E. Conner, an ophthalmologist and eye surgeon, worked as a member of
the medical staff at Salina Regional Health Center Inc. (Salina), in Salina, Kansas, for 18
years. In the mid-1990s, Conner’s relationship with Salina became contentious when he
began complaining that the hospital hired unqualified scrub staff, provided inadequate
facilities and equipment, and failed to meet required standards of care.

In 1995, as the result of a dispute over surgery performed on a particular patient, Salina
suspended Conner’s privileges to perform certain ophthalmic procedures at its facilities.

Subsequently, Salina’s chief executive officer sent Conner a letter indicating the hospital
would restore Conner’s privileges if he agreed to contract with preferred scrub staff for
his procedures when he felt the hospital’s staff did not meet his needs. The letter also
said Salina would accept a prior offer from Conner to work with its surgery department in
providing additional training to the hospital’s scrub staff.

Conner would not sign the “ cooperation agreement,” and the hospital refused to lift
Conner’s suspension. Conner continued, however, to perform other types of surgery until
early 1997, when Salina declined to reappoint him to its medical staff.

After a number of unsuccessful attempts to bring state law claims in state court against
Salina, Conner filed his qui tam action in the U.S. District Court for the District of Kansas
in June 2001. In his lawsuit, Conner alleged violations of the FCA, as well as pendant
state law claims for breach of contract and tortious interference. The federal government
declined to intervene in the case.

The district court ruled that Conner had failed to state a claim under the FCA for Salina’s
alleged failure to comply with Medicare statutes and regulation because the government’s
payment for services rendered was not conditioned on such compliance. In addition, the
court found Conner’s claim under the anti-kickback statute failed to allege that Salina had
solicited a kickback in return for Medicare referrals.

The court declined to dismiss the state law claims as time-barred under the applicable
Kansas statute of limitations, but refused to exercise supplemental jurisdiction over

The Tenth Circuit also rejected Conner’s assertion that the certifications contained in
Salina’s annual Medicare costs reports, standing alone, explicitly conditioned Medicare
payments on compliance with all applicable Medicare statutes and regulations.

“Although [the] certification [in the annual report] represents compliance with underlying
laws and regulations, it contains only general sweeping language and does not contain
language stating that payment is conditioned on perfect compliance with any particular
law or regulation,” the appeals court said. “Nor does any underlying Medicare statute or
regulation provide that payment is so conditioned.”

“Based on the fact that the government has established a detailed administrative
mechanism for managing Medicare participation, we are compelled to conclude that
although the government considers substantial compliance a condition of ongoing
Medicare participation,” the appeals court further explained, “it does not require perfect
compliance as an absolute condition to receiving Medicare payments for services

The Tenth Circuit also noted that state agencies are responsible for conducting surveys to
evaluate providers’ compliance with federal and state statutes and regulations. The
“broad reading of the FCA” proposed by the plaintiff, according to the appeals court
“would burden the federal courts with deciding whether medical services were performed
in full compliance with a host of Medicare statutes and regulations.”

In addition, the appeals court rejected Conner’s assertion that Salina violated the FCA by
submitting claims while failing to comply with the anti-kickback statute (42 U.S.C. §
1320a-7b). Conner alleged that Salina violated the anti-kickback statute by “forcing” him
to provide scrub staff at his own expense, “in exchange for the receipt of hospital
privileges and the attendant lucrative right to receive Medicare referrals.”

The appeals court held Conner's “refusal to use . . . allegedly subpar staff and Salina’s
attempt to accommodate this refusal” did not amount to a kickback.

Finally, the Tenth Circuit found the district court erred in concluding that Conner’s state
law claims were not barred by the applicable Kansas statute of limitations. Those claims
should have been dismissed with prejudice, the appeals court said.

United States ex rel. Conner v. Salina Reg’l Health Ctr., No. 07-3033 (10th Cir. Oct. 2,

CMS Clarifies Guidance Regarding State Repayment Obligation To
Government For Money Recovered Under State FCAs; Alabama
Challenges Policy In Court
In an October 28, 2008 letter to state health officials, the Centers for Medicare and
Medicaid Services (CMS) clarified that when a state recovers money pursuant to a legal
action under its State False Claims Act (SFCA), the state must pay to the government not
only the federal amount originally paid attributable to fraud or abuse, but also a Federal
Medical Assistance Percentage (FMAP)-rate proportionate share of any other recovery.

“Any State action taken as a result of harm to a State’s Medicaid program must seek to
recover damages sustained by the Medicaid program as a whole, including both Federal
and State shares,” the letter said.

The letter also said that states “are required to return the FMAP percentage on State
recoveries based upon actions brought against third parties, such as actions against
pharmaceutical companies, alleging inappropriate Medicaid expenditures.”

Regarding whistleblower cases, CMS said states may not deduct the relator's share of the
recovery, nor legal expenses or other administrative costs arising from the litigation,
from the federal portion due the government.

The letter did note, however, that “[t]o the extent attributable to Medicaid recoveries,
these costs may be the basis for claims for reimbursement as an administrative cost that
benefits the Medicaid program and reimbursed at the regular administrative percentage

According to the letter, states must repay the government within a 60-day period from
the discovery of the overpayment.

The state of Alabama challenged CMS’ new policy in federal court in a suit filed November
3, 2008.

According to a statement made by Alabama Attorney General Troy King, the
government’s new policy is intended to lay claim to money recovered by the state’s
successful litigation against 79 pharmaceutical companies for average wholesale price

The government “through illegitimate and heavy-handed bureaucratic processes” is trying
“to now confiscate monies that are being contested on appeal and of which Alabama has
yet to receive even one dime itself,” Troy said.

Troy said in his statement that if the government prevails on its new policy it “would
leave those for whom CMS was created to serve, Alabama's Medicaid patients, without
health care and would bankrupt the State of Alabama's budget.”

Ninth Circuit Finds District Court's Summary Judgment Order In
FCA Case Is Final Despite Pending Claim By Relator
In an issue of first impression, the Ninth Circuit found December 16, 2008 that a district
court's order granting summary judgment in a False Claims Act (FCA) case is final and
appealable even though the lower court retained jurisdiction over a pending claim by the
qui tam relator who initiated the suit for a share of the award.

Relator Jody Shutt originated an FCA action against Nida Campanilla, the sole owner and
president of Community Home and Health Care Services.

Subsequently, the United States pursued criminal charges against Campanilla who
entered a guilty plea to one count of healthcare fraud.

Under the plea agreement, Campanilla stipulated to making illegal payments to
physicians, patients, and marketers; forging physician signatures on Medicare forms
documenting the medical necessity of claimed services; submitting reimbursement claims
to Medicare for home health services she knew were not medically necessary; and
submitting reimbursement claims for services that were not performed as represented.

The United States intervened in Shutt's FCA case, seeking a civil penalty of $5,500 and
treble damages. The district court granted partial summary judgment to the government,
awarding a civil penalty of $5,500 and treble the damages that Campanilla had admitted
in her plea agreement.

The district court dismissed the government’s remaining common law claims without
prejudice while retaining jurisdiction over the relator’s claim for a share of the judgment.

Campanilla appealed the grant of summary judgment. Before reaching the merits of the
appeal, the Ninth Circuit considered whether the order was final and appealable under 28
U.S.C. § 1291.

The appeals court concluded that a relator’s pending claim against the United States for a
share in the judgment did not interfere with the finality of the district court order.

In so holding, the appeals court relied on White v. New Hampshire Dep’t of Employment
Sec., 455 U.S. 445 (1982), in which the Supreme Court held that requests for attorneys'
fees are collateral to the main action.

"The determination of the relator’s share of an FCA award, like the award of attorney’s
fees, raises factual issues 'collateral to the main action' because it involves a factual
inquiry distinct from one addressing the merits," the appeals court said.

Turning to the merits of Campanilla's appeal, the court held in an unpublished
memorandum that Campanilla's challenge to the award on double jeopardy grounds was
meritless because she voluntarily waived a double jeopardy challenge in her plea
agreement with the United States.

The appeals court also found the judgment against Campanilla and Community Home of a
single civil penalty of $5,500 and treble damages of approximately $1.8 million was not
constitutionally "excessive" as "grossly disproportionate" to the offense.

In support of its conclusion, the appeals court noted "the district court found substantial
evidence that the government’s actual damages due to false claims were considerably
higher than the remuneration Campanilla agreed to pay in her criminal plea and might
even exceed the treble damages award."

United States ex rel. Shutt v. Community Hosp. and Healthcare Servs., Inc., No. 07-
56060 (9th Cir. Dec. 16, 2008).

Sixth Circuit Holds Whistleblower Action Against Medtronic
Barred Under FCA’s Public Disclosure Provision
A whistleblower action alleging device manufacturer Medtronic Inc. and various physician
defendants violated the False Claims Act (FCA) was jurisdictionally barred because the
complaint was based on information publicly disclosed in a prior civil action and the
relator was not an original source, the Sixth Circuit held in a January 14, 2009 opinion
affirming the complaint’s dismissal.

Jacqueline Kay Poteet, a former travel services senior manager for Medtronic subsidiary
Medtronic Sofamor Danek USA, Inc (MSD), brought the action under the FCA’s qui tam
provision alleging MSD provided physicians with numerous kickbacks, including sham
consulting research, sham royalty agreements, and lavish trips, in exchange for the use
of its spinal implants and other surgical devices.

Poteet contended defendants violated the FCA by submitting numerous false, fraudulent,
and ineligible claims for Medicare reimbursement of MSD products that stemmed from
the illegal kickbacks.

Before Poteet initiated her qui tam action in 2003, Scott Wiese, also a former MSD
employee, filed a wrongful termination suit against Medtronic and MSD in California state
court, alleging he was fired because he refused to pay illegal kickbacks and bribes to
physician customers in exchange for their business.

Also before Poteet’s action, a former MSD attorney, identified as “John Doe” in the
opinion, filed a qui tam action in 2002 making similar allegations that MSD violated the
FCA and Anti-Kickback Statute by providing monetary and in kind compensation to
physicians as an inducement to use its surgical products.

The government moved to dismiss Poteet’s qui tam action, arguing it was barred by the
FCA’s first to file-provision, 31 U.S.C. § 3730(b)(5), and public disclosure provision, 31
U.S.C. § 3730(e)(4)(A). Dismissal of Poteet’s and Doe’s action was a condition of a prior
$40 million settlement the government reached with Medtronic and MSD.

The district court granted the motion, finding both the first-to-file and the public
disclosure provisions applied to bar Poteet’s action.

The Sixth Circuit affirmed, fholding while the first-to-file rule was not technically
applicable, the public disclosure provision did bar Poteet’s action.

The appeals court first noted that Wiese’s complaint was clearly a “public” disclosure and
the allegations in his complaint were sufficient to put the government on notice of
potential fraud by MSD and its physician customers.

Although Wiese’s wrongful termination action did not directly allege fraud under the FCA,
the details he provided “presented enough facts to create an inference of wrongdoing,”
the appeals court said.

The appeals court also held Poteet’s action was “based” on the disclosed fraud, saying
while the details in the two complaints differed slightly the illegal kickback scheme
described in Poteet’s complaint essentially mirrored Wiese’s allegations.

Next, the appeals court found Poteet did not qualify as an “original source” of the
allegations in her complaint.

While in her former position as an MSD senior manager Poteet arguably had “direct and
independent knowledge of most of the facts alleged in her complaint, she undisputedly
failed to provide this information to the government before filing her complaint and
before the filing of the Wiese complaint.”

Despite finding the public disclosure provision barred Poteet’s action, the appeals court
nonetheless went on to “clarify” why the first-to-file rule did not serve as an additional
basis for dismissing her complaint.

According to the appeals court, Doe’s FCA action, which also alleged the same fraudulent
scheme, would otherwise bar Poteet’s action under the first-to-file rule.

However, according to the appeals court, Doe’s action itself appeared to be
jurisdictionally barred as it was based on the prior public disclosure made in the Wiese
complaint and Doe was most likely not an “original source” because he never shared his
information about Medtronic and MSD with the government before filing his qui tam

United States ex rel. Poteet v. Medtronic, Inc., No. 07-5262 (6th Cir. Jan. 14, 2009).

Third Circuit Holds FCA Action Against Hospital Based On
Alleged Stark, AKS Violations Should Proceed
A lower court erred in granting summary judgment to a hospital in a whistleblower action
under the False Claims Act (FCA) that was based on allegations the hospital's
arrangement with an anesthesiology practice group for pain management services
violated the Stark Law and the Anti-Kickback Statute, the Third Circuit held January 21,

The appeals court rejected the lower court’s conclusion that the defendant hospital had
satisfied the personal services exception under Stark, finding an earlier agreement
between the parties did not cover pain management services provided by the practice at
a subsequently opened hospital clinic, nor did the agreement “by definition” reflect fair
market value for compensation that included free office space, supplies, and support

The Third Circuit said it was only specifically addressing the Stark Law exception in its
opinion since the Anti-Kickback Act’s safe harbor provision was substantially identical.

Ted D. Kosenske brought the qui tam action under the FCA against Carlisle HMA, Inc.
(HMA) and its parent company Health Management Associates, Inc, alleging they
submitted claims to federal healthcare programs falsely certifying compliance with the
Stark Law and the Anti-Kickback Statute.

In 1992, Kosenske’s former practice Blue Mountain Anesthesia Associations, P.C. (BMAA)
entered into an exclusive service arrangement with Carlisle Hospital and Health Systems
(CHHS) for anesthesia services at CHHS’ hospital in Carlisle, Pennsylvania.

In 1998, the hospital built a new, stand-alone facility containing an outpatient ambulatory
surgery center and a pain clinic (clinic), located roughly three miles from the hospital.

From its inception, BMAA acted as the exclusive provider of pain management services to
patients at the clinic. The hospital did not charge BMAA rent for the space and
equipment, or a fee for the support personnel the hospital provided to the practice at the
clinic. At the same time, BMAA physicians referred clinic patients to the hospital for
further testing and procedures.

The parties did not amend the 1992 agreement to encompass the pain management
services provided at the clinic, the appeals court said. HMA purchased the hospital from
CHHS in June 2001. For purposes of the opinion, the appeals court assumed, without
deciding, that HMA was CHHS’ successor.

According to the complaint, the pain management services BMAA provided at the HMA
outpatient clinic resulted in illegal referrals under the Stark and Anti-Kickback Statutes
for which the hospital submitted claims to federal healthcare programs.

The district court found BMAA received numerous benefits—such as free use of office
space, equipment, and staff and the exclusive right to provide anesthesiology and pain
management services—that constituted “remuneration” and established a “compensation
arrangement” and “financial relationship” between BMAA and HMA.

The court granted defendants summary judgment, however, after concluding they had
satisfied the “personal services exception” under Stark. See 42 U.S.C. §

Specifically, the court found the 1992 agreement adequately set forth in writing all of the
anesthesiology and pain services to be rendered by BMAA at the hospital and pain
management clinic. In addition, the court held the agreement “by definition” reflected fair
market value as it resulted from a negotiation between unrelated parties.

The Third Circuit agreed the arrangement between BMAA and HMA implicated the Stark
Law, but rejected the district court’s conclusion that defendants had met their burden of
showing the arrangement satisfied the personal services exception.

The appeals court said the 1992 agreement clearly did not apply to services at a facility
that was not even in existence at the time the contract was negotiated.

“[E]ven if the 1992 Agreement could otherwise be read as reflecting the parties’
arrangement at the Pain Clinic, that Agreement said nothing about much of the
consideration that BMAA was receiving for its services,” the appeals court wrote.

The appeals court also rejected the district court’s conclusion that the parties’ agreement
itself was a reflection of fair market value.

“[A]s a factual matter, negotiations in 1992 could not possibly reflect the fair market
value of the consideration given and received more than six years later under materially
different circumstances,” the appeals court observed.

In any event, the appeals court continued, the Stark Law is based on the recognition that
“where one party is in a position to generate business for the other, negotiated
agreements between such parties are often designed to disguise the payment of non-fair-
market-value compensation.”

Finally, the appeals court rejected HMA’s argument that the patients BMAA physicians
saw at the pain clinic already were de facto hospital patients and therefore there could
have been no actual referrals.

According to the appeals court, this argument was based on the regulation (42 C.F.R. §
413.65) for determining whether a facility has provider-based status and had no bearing
on a Stark analysis concerning impermissible referrals.

“While Pain clinic patients clearly must have access to all services provided by the
Hospital in order for it to be considered a part thereof, we are unpersuaded that BMAA
physicians at the Clinic have been deprived of the right to refer their patients in
accordance with their best medical judgment,” the appeals court concluded.

In reversing the lower court’s determination, the appeals court also highlighted the
distinction between anesthesiology and pain management services in the context of the
Stark Law. Saying the latter, as a traditional hospital-based service, was less likely to
raise concerns under the Stark Law than the former, which frequently is provided in an
outpatient facility by physicians in a position to refer substantial business to a hospital.

United States ex rel. Kosenske v. Carlisle HMA, Inc., No. 07-4616 (3d Cir. Jan. 21, 2009).

U.S. Court In Texas Dismisses FCA Action Alleging Hospitals'
Below-Market Leases With Physicians Rendered Medicare Claims
A federal district court in Texas dismissed January 22, 2009 a qui tam action filed by a
relator alleging False Claims Act (FCA) violations based on Medicare claims made for
patients referred to defendant-hospitals’ facilities by physicians with below-market

Although finding that similar prior litigation did not trigger the FCA’s “public disclosure”
jurisdictional bar, the district court nonetheless dismissed the case for failure to plead
fraud with particularity as required under Fed. R. Civ. P. 9(b).

Relator Danny Lynn Smart filed his initial complaint under seal in June 2005. After the
federal government declined to intervene, the complaint was unsealed in May 2006. The
relator subsequently filed an amended complaint in February 2008.

Smart was a former employee of Christus Spohn Health System (Spohn), where he was
the director of property management. Spohn and Christus Health System (collectively
defendants) operate three hospital campuses in Corpus Christi, Texas.

Defendant hospitals entered into below-market leases with physicians groups who would,
in return, refer more patients to defendants’ facilities, according to Smart’s complaint.
This conduct violated the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), and the Stark
Law, 42 U.S.C. § 1395nn, as well as similar state laws, the complaint contended.

Smart also alleged defendants’ violations of these statutes subjected them to liability
under the FCA because Medicare claims made for patients referred to their facilities by
physicians with below-market leases were fraudulent.

In addition, Smart alleged defendants unlawfully fired him in retaliation for filing his

Defendants moved to dismiss, arguing the district court was barred by the “public
disclosure” provision (31 U.S.C. § 3730(e)(4)(A)) from taking jurisdiction over the suit
because Smart’s allegations had been made before in state litigation involving another
defendant, Ross Physical Therapy and Rehabilitation.

According to defendants, the Ross litigation was a “public disclosure” of the allegations
made in the present qui tam action, and Smart was not an “original source” of the
information relied upon in his qui tam action.

In rejecting this argument, the district court noted the Ross litigation cited only a
violation of the Stark Law, but made no mention of the FCA or Medicare fraud.

“[T]here is no support for Defendants’ argument that the Ross litigation provides the
basis for Relator’s suit,” the court said. “It is a difficult claim indeed to argue that one
paragraph in a purely private litigation with an obscure reference to the Stark law. . .
actually put the government on notice of the scheme alleged by Relator.”

The district court then found, however, that dismissal of the case was warranted because
of Smart’s failure to meet the “pleading particularity” requirements of Rule 9(b).

“Relator’s complaint is devoid of anything but general allegations that ‘illegal claims’ was
submitted for payment under Medicare,” the district court said.

“[W]hile Relator has perhaps alleged with particularity that the Stark and Anti-Kickback
statutes were violated, this does not repair the key problem: Relator has not alleged a
violation of the False Claims Act,” the court said.

The district court also found Smart’s “false certification” claims failed to meet the
particularity standards of Rule 9(b).

“Relator fails to identify . . . when Defendants falsified certifications and what the
contents of those certifications were,” the court said.

The district court next dismissed Smart’s retaliation claim because the applicable 180-day
statute of limitations (Tex. Health & Safety Code § 161.134(h)) had expired by the time
he amended his qui tam complaint to add the claim.

The district court allowed the relator 20 days to file an amended complaint to address the
deficiencies identified in its opinion.

United States ex rel. Smart v. Christus Health, Civ. Action No. C-05-287 (S.D. Tex. Jan.
22, 2009).

Fourth Circuit Affirms Dismissal Of FCA Action Against
Physician, Hospitals For Alleged Fraudulent Billing
The Fourth Circuit upheld February 12, 2009 the dismissal of a False Claims Act (FCA)
case against a physician and two hospitals he was associated with based on lack of
jurisdiction under the public disclosure provision of the statute.

The appeals court agreed with the lower court that relator Lokesh Vuyyuru’s claims were
based on information publicly disclosed in various media reports and that he was not an
“original source” of the allegations in his complaint.

Relator brought the qui tam action, in which the federal government declined to
intervene, against physician Gopinath Jadhav, Southside Gastroenterology Associates,
Ltd., Petersburg Hospital Company, LLC, and Columbia/HCA John Randolph, Inc. for
allegedly conspiring to fraudulently bill Medicare and Medicaid for unnecessary

According to relator, Jadhav, a gastroenterologist, routinely did unnecessary biopsies
during colonoscopies and then charged Medicaid, Medicare, and private insurers for the

Defendants moved to dismissed on a number of grounds. The district court granted the
motion finding it lacked subject matter jurisdiction under the FCA’s public disclosure

The district court also ordered relator to pay attorneys’ fees and costs in the amount of

Affirming, the appeals court first rejected relator’s argument that the jurisdictional issues
were intertwined with the central merits of his FCA claims.

“The proof required to establish the substantive elements of Relator Vuyyuru’s claims . . .
is wholly distinct from that necessary to survive Defendant’s jurisdictional challenge,” the
appeals court said.

Next, the appeals court upheld the lower court’s conclusion that relator’s allegations were
derived from public disclosures—specifically a series of media reports concerning
defendants’ alleged fraudulent practices that were published before he filed his

Specifically, the appeals court noted that relator had denied under oath that he was the
source of the articles at issue.

The appeals court also concluded that relator was not entitled to original source status.

Although relator had previously practiced medicine at one of the hospitals involved in the
allegations; he no longer did so at the time the alleged false claims were discovered.

According to the appeals court, relator offered “no more than a scintilla of evidence that
he had direct and independent knowledge” of his FCA allegations.

The appeals court also rejected relator’s contention that the district court erred in
dismissing his action without affording him the chance to conduct discovery on the
jurisdictional issues of fact.

According to the appeals court, relator had ample notice of defendants’ jurisdictional
challenge and, moreover, failed to identify any evidence he might have obtained through
discovery that would be relevant to establish the jurisdictional facts in his favor.

Finally, the appeals court affirmed the award of attorneys’ fees, finding no reasonable
chance of success that Vuyyuru’s claim qualified as a proper relator under the FCA.

A dissenting opinion argued “the evidence before the district court was sufficient to
support a conclusion that Relator Vuyyuru had carried his burden of demonstrating that
his knowledge of the alleged fraudulent acts was not 'based upon' public disclosure.”

Specifically, the dissent pointed to relator’s allegations that he learned of the unnecessary
biopsies by reviewing Jadhav’s medical records and from medical staff who observed his

The dissent also disagreed with the majority’s conclusion that relator was not an original

United States ex rel. Vuyyuru v. Jadhav, No. 07-1455 (4th Cir. Feb. 12, 2009).

Anti-Kickback Statute
OIG Gives Green Light To Proposed Joint Ownership Of ASC By
Healthcare Organization And Surgeon Group
In an advisory opinion posted July 25, 2008 the Department of Health and Human
Services Office of Inspector General (OIG) concluded that, while a proposed joint
ownership of an ambulatory surgery center (ASC) by a healthcare organization and a
group of orthopedic surgeons could potentially generate prohibited remuneration under
the Anti-Kickback Statute, it would not impose administrative sanctions in connection
with the proposed arrangement.

The OIG found the risk for fraud was low because of safeguards within the proposed
arrangement that would minimize the possibility of improper referrals to the ASC.

The healthcare organization requesting the advisory opinion is a nonprofit corporation
that owns three hospitals and other healthcare-related entities, including a large
physician group practice.

The other requesting party, a surgeon partnership, is a limited liability company whose
members (surgeon investors) are also members of a large multi-site physician group
(surgeon group).

Another party in the proposed arrangement is the company that would own and operate
the ASC. Under the arrangement, this company would be owned 70% by the surgeon
partnership and 30% by the healthcare organization, according to the opinion. The two
requesting parties both made financial contributions to the company proportional to their
ownership interests, in order to finance the development and operation of the ASC.

Of 18 surgeons investors in the partnership, all but four meet the so-called “one-third
requirement” under the anti-kickback safe harbor (42 C.F.R. § 1001-952( r)(4)) for
hospital/physician-owned ASCs (42 C.F.R. § 1001-952( r)(4)), the opinion noted. That
requirement states that the surgeon/owner must derive at least one-third of his or her
medical practice income for the previous fiscal year (or 12-month period) from
performing procedures payable by Medicare in the ASC setting.

Requestors certified that the four surgeon investors (inpatient surgeons) rarely have
occasion to refer patients to other physicians for ASC-qualified procedures (with the
exception of pain management procedures).

The OIG concluded the proposed arrangement would not qualify for the safe harbor.
Among multiple reasons provided for this conclusion was that the surgeon investors
would not hold their investment interests in the ASC either directly or through a group
practice composed of qualifying physicians. Rather, the surgeon investors would hold
their individual ownership interests in the surgeon partnership, which in turn would hold
an interest in the company that owns the ASC.

“We have previously expressed concern that intermediate investment entities could be
used to redirect revenues to reward referrals,” the OIG said, “or otherwise vitiate the
safeguards provided by direct investment, including distributions of profits in proportion
to capital investment.”

Given the facts of this case, however, the OIG concluded the use of a “pass-through”
entity would not substantially increase the risk of fraud and abuse because each surgeon
investor’s ownership in the surgeon partnership was proportional to his or her capital
investment, and in turn, the surgeon partnership’s interest in the company that owns the
ASC would be proportional to its capital investment.

“Thus, the individual Surgeon Investors receive a return on their ASC investments that is
exactly the same as if they had invested directly,” the opinion said.

Another reason the arrangement did not qualify for protection under the safe harbor was
the fact that four surgeon investors failed to meet the safe harbor’s “one-third”
requirement, the OIG noted.

Nonetheless, the OIG determined that, under the proposed arrangement, the ASC was
“unlikely to be a vehicle” for generating profits from referrals for the four surgeons.

Specifically, the OIG said the requestors had certified that none of the surgeon investors
would refer patients for pain management procedures to be performed at the ASC, unless
the pain management procedure would be performed personally by the referring surgeon

In addition, the proposed arrangement did not qualify for the safe harbor because the
healthcare organization was in a position to make or influence referrals to the ASC.

However, the OIG concluded that there were sufficient safeguards to significantly
constrain the ability of the healthcare organization to direct or influence referrals to the

The requestors certified that the organization would refrain from any actions to require or
encourage physicians who are employees, independent contractors, and medical staff
members (hospital-affiliated physicians) to refer patients to the ASC or to its surgeon
investors, the opinion said. In addition, requestors certified that the healthcare
organization would not track referrals, if any, by hospital-affiliated physicians to the ASC
or surgeon investors.

Advisory Opinion No. 08-08 (Dep’t of Health and Human Servs. Office of Inspector Gen.
July 18, 2008).

OIG Approves Surgeon, Hospital Gainsharing Arrangement
The Department of Health and Human Services Office of Inspector General (OIG) will not
impose sanctions on a medical center that has agreed to share with groups of orthopedic
surgeons and a group of neurosurgeons a percentage of its cost savings arising from the
surgeons’ implementation of a number of cost reduction measures, OIG said in an
Advisory Opinion posted August 7, 2008.

The requestor is an academic medical center that is a participating provider in the
Medicare and Medicaid programs. The orthopedic surgery groups and neurosurgery group
(collectively, the groups) employ physicians that have active medical staff privileges at
the medical center. The medical center has also engaged a program administrator to
administer the arrangement.

According to the opinion, under the arrangement, the medical center agreed to pay the
orthopedic surgery groups and the neurosurgery group a share of the first-year cost
savings directly attributable to specific changes made in the groups' operating room

The opinion noted the requestors have already implemented the arrangement, but the
medical center has not yet paid any money to the groups.

"Properly structured, arrangements that share cost savings can serve legitimate business
and medical purposes," OIG said, noting, however, that such arrangements also can
"potentially influence physician judgment to the detriment of patient care."

The civil monetary penalty (CMP) provisions prohibit payments by hospitals to physicians
that may induce physicians to reduce or limit items or services furnished to their
Medicare and Medicaid patients. Thus, the threshold inquiry is whether the arrangement
will induce physicians to reduce or limit items or services, OIG said.

Noting that the cost saving measures "might have induced physicians to reduce or limit
the then-current medical practice at the Medical Center," the OIG nonetheless found that

several features of the arrangement, in combination, provide sufficient safeguards so that
OIG would not impose sanctions, the opinion said.

Specifically, OIG pointed to eight aspects of the arrangement that would safeguard it
against abuse, including: that the specific cost saving actions and resulting savings were
clearly and separately identified; the requestors proffered credible medical support that
implementation of the recommendations did not adversely affect patient care; the
arrangement protected against inappropriate reductions in services by utilizing objective
historical and clinical measures to establish baseline thresholds beyond which no savings
accrued to the groups; the parties provided written disclosures of their involvement in the
arrangement to patients whose care might have been affected and provided patients an
opportunity to review the cost saving recommendations prior to admission to the medical
center; and the financial incentives under the arrangement were reasonably limited in
duration and amount.

With regard to the Anti-Kickback Statute, the OIG noted the arrangement would not fall
under the safe harbor for personal services and management contracts, 42 C.F.R. §
1001.952(d), because the payment owed to the groups was calculated on a percentage
basis, and thus the compensation could not be set in advance.

According to the opinion, the arrangement "could have encouraged the surgeons to admit
Federal health care program patients to the Medical Center, since the surgeons would
receive not only their Medicare Part B professional fee, but also, indirectly, a share of the
Medical Center’s payment, depending on cost savings."

However, OIG decided not to impose sanctions because: the circumstances and
safeguards of the arrangement reduced the likelihood that it was used to attract referring
physicians or to increase referrals from existing physicians; the structure of the
arrangement eliminated the risk that it might be used to reward surgeons or other
physicians who refer patients to the groups; and the arrangement set out with specificity
the particular actions that generated the cost savings on which the payments will be

Notwithstanding its decision not to impose sanctions, OIG warned that it still harbored
"concerns regarding many arrangements between hospitals and physicians to share cost

"In short," OIG said, "this opinion is predicated on the specific arrangement posed by the
Requestors and is limited to that specific arrangement. Other apparently similar
arrangements could raise different concerns and lead to a different result."

Advisory Opinion No. 08-09 (Dep’t of Health and Human Servs. Office of Inspector Gen.
July 31, 2008).

Physician Group’s Proposal To Lease Space, Equipment To Other
Physicians May Result In Administrative Sanctions, OIG Says
A physician practice group’s proposal to provide space, equipment, and personnel to
other physician practice groups through block leases could potentially generate prohibited
remuneration under the Anti-Kickback Statute and could potentially result in
administrative sanctions under sections 1128(b)(7) or 1128A(a)(7) of the Social Security
Act, the Department of Health and Human Services Office of Inspector General (OIG) said
in an advisory opinion posted August 26, 2008.

The physician group practice requestor provides cancer treatment services in a free-
standing facility. One of the treatments offered at the facility is intensity-modulated
radiation therapy (IMRT).

Patients with prostate cancer who receive IMRT at the facility are referred to the
requestor by urologists, the opinion said.

The requestor wants to enter into an arrangement with some urology physician groups
(the Urologist Groups) whereby the Urologist Groups would lease, on a part-time basis,
the space, equipment, and personnel services necessary to perform IMRT.

Specifically, the opinion explained, each Urologist Group would lease examination and
treatment rooms at the facility for fixed periods of at least eight hours per week, in the
same space where the requestor provides IMRT.

According to the opinion, the series of agreements that would make up the proposed
arrangement, in effect, establish a joint venture between the requestor and the Urologist

“The OIG has longstanding concerns about certain problematic joint venture
arrangements between those in a position to refer business, such as physicians, and
those who furnish items or services for which Medicare or Medicaid pays, especially when
all or most of the business of the joint venture is derived from one of the joint venturers,”
the OIG said in its opinion.

As set forth in a Special Advisory Bulletin issued by the OIG, “suspect joint venture
arrangements typically exhibit certain common elements, several of which are present in
the Proposed Arrangement,” the opinion said.

Under the proposed arrangement, the OIG noted, the Urologist Groups would be
expanding into a related line of business, which is dependent on referrals from the
Urologist Groups.

“On the whole,” the OIG concluded, “the Urologist Group would commit little in the way
of financial, capital, or human resources to the IMRT and, accordingly, would assume
very little real business risk.”

Other problematic elements of the proposed arrangement, according to the OIG, are:
that the requestor is an established provider of the same services that a Urologist Group
would provide under the proposed arrangement and is in a position to directly provide the
IMRT in its own right; and that the aggregate income to the Urologist Groups under the
proposed arrangement would vary with referrals from the Urologist Groups to the Facility,
and, because the various agreements could be tailored to fit the historical pattern of
referrals by the Urologist Groups, so might the income to the requestor.

In addition, the OIG also flagged the facts that a Urologist Group would use the premises,
equipment, and staff of the requestor to serve its own patient base and that the
requestor and the Urologist Groups would share in the economic benefit of the IMRT.

In finding that it could impose sanctions, the OIG highlighted that “the Requestor may be
offering the Urologist Groups impermissible remuneration by giving them the opportunity
to obtain the difference between the reimbursement received by the Urologist Groups
from the Federal health care programs and the rent and fees paid by the Urologist Groups
to the Requestor and the individual Radiologists.”

The OIG further noted that “[i]f the intent of the Proposed Arrangement were to give the
Urologist Groups remuneration through the IMRT to induce referrals to the Requestor, the
anti-kickback statute would be violated.”

Advisory Opinion No. 08-10 (Dep't of Health and Human Servs. Office of Inspector Gen.
Aug. 19, 2008).

OIG Approves Company’s Proposal To Provide Administrative
“Preauthorization” Services To Radiology/Imaging Centers
A company’s proposal to create a new subsidiary to provide administrative insurance
preauthorization processing services for radiology and imaging centers would not
generate prohibited remuneration under the federal anti-kickback statute, the
Department of Health and Human Services Office of Inspector General (OIG) said in an
advisory opinion posted September 26, 2008.

Accordingly, OIG said it would not impose administrative sanctions on the company
(requestor) under federal fraud and abuse laws in connection with the proposal.

Under the proposed arrangement, the requestor would form and wholly own and manage
a new legal entity (Newco), which would contract with various radiology and imaging
centers (collectively, centers) across the nation to provide “purely administrative services
consisting solely of the processing and submission of insurance preauthorizations” for
certain procedures whenever an insurer of a patient at a center required such
preauthorization, the opinion said.

According to the requestor, the centers would provide Newco with the pertinent patient
information required for Newco to process the preauthorizations. For Newco’s services,
the centers would pay a “per service” fee for each preauthorization processed and
submitted, regardless of whether the patient’s insurer ultimately granted the
preauthorization for the particular procedure.

The requestor certified the fee paid to all centers would be the same, and would
represent “fair market value in an arm’s-length transaction” for the services performed.
In addition, the requestor certified that neither it nor Newco (nor their affiliates) would
have any other direct or indirect financial relationship with the centers or their affiliates.

Under these factual circumstances, OIG concluded that the proposed arrangement would
not result in illegal referrals of federal healthcare program business.

First, OIG emphasized that neither the requestor nor its affiliates are or would be
healthcare providers or suppliers or in any way affiliated with the healthcare industry.

Second, the services to be provided by Newco would be “purely” administrative and
therefore would not involve marketing to promote an item or service, OIG explained.

Further, “[a]ll patient information would be supplied by the Centers, without any
independent information by the [r]equestor or Newco . . . through contacts with Center
referral sources (e.g., patients or physicians),” OIG said. These services “do not rise to
the level of arranging for or recommending purchasing, leasing, or ordering items or
services payable under a Federal health care program.”

Newco’s services also do not involve coding, billing, or claims processing or review,
“which are activities that can, in some circumstances, generate Federal health care
program business,” OIG said.

OIG also distinguished the proposed arrangement from potentially problematic
arrangements “where administrative services are provided by, or on behalf of, a supplier,
such as an imaging company or a manufacturer, to an existing or potential referral

In these circumstances, a risk exists that at least one purpose of providing the services is
to influence referrals to the party providing the services, OIG acknowledged.

However, under the facts of the proposed arrangement, OIG concluded that such risk is
not a concern because neither the requestor nor its affiliates are in a position to receive
or influence referrals of federal healthcare program business.

Advisory Opinion No. 08-12 (Dept. of Health and Human Servs. Office of Inspector Gen.
Sept. 19, 2008).

OIG Approves Gainsharing Arrangement Between Hospital And
Cardiology Groups
In an advisory opinion posted October 14, 2008, the Department of Health and Human
Services Office of Inspector General (OIG) approved an existing gainsharing arrangement
between an acute care hospital and two cardiology groups in which the hospital shares
with the groups a percentage of the hospital’s savings arising from the cardiologists’
implementation of recommended cost-reduction measures.

According to OIG, the arrangement could constitute an improper payment to a physician
to induce reduction or limitation of services to Medicare or Medicaid beneficiaries under
the physician’s direct care, thereby triggering the civil monetary penalty (CMP) set forth
in §§ 1128A(b)(1)-(2) of the Social Security Act (Act).

In addition, OIG said the arrangement could potentially generate prohibited remuneration
under the Anti-Kickback Statute (§ 1128B(b) of the Act), which prohibits payments to
physicians for referring federal healthcare program business to a facility.

However, OIG said it would not impose sanctions because, given the factual
circumstances and the safeguards certified by the requestors, the arrangement posed a
low risk of fraud and abuse.

OIG emphasized that its opinion was limited to the facts presented, and that other
apparently similar gainsharing arrangements could raise different concerns and lead to a
different result.

Under the proposed arrangement, the hospital agreed to pay each of the two cardiology
groups a share of three years of cost savings directly attributable to specific changes in
that particular group’s cardiac catheterization laboratory (cath lab) practices.

The requestors already have implemented the three-year arrangement (which is still
ongoing) under which payments are owed to each of the cardiology groups at the end of
each year, OIG explained.

The 30 recommended cost-savings measures, which are the subject of the arrangement,
fall into three categories: product standardization, use-as-needed cardiac medical
devices, and product substitution, according to the opinion.

Under the arrangement, the hospital would pay each of the cardiology groups separately
for 50% of the yearly savings achieved by the particular group when implementing the
30 measures.

OIG concluded that, although the 30 recommended measures implicated the CMP,
several features of the arrangement provided sufficient safeguards against fraud and

Specifically, OIG noted that the cost-saving actions and resulting savings involved in the
arrangement were clearly and separately identified, and that such transparency allowed
for public scrutiny and individual physician accountability for any adverse effects on
patient care caused by the arrangement.

In addition, the requestors proffered credible medical support for the position that
implementation of the 30 recommended measures has not adversely affected patient
care, the opinion said, and also certified that the arrangement is periodically reviewed to
confirm that it does not have an adverse impact on clinical care.

Further, the amounts to be paid to physicians under the arrangement have been based
on all procedures regardless of patients’ insurance coverage, subject to the cap on
payment for federal healthcare program procedures, according to the opinion. Also, the
procedures to which the arrangement applies have not been disproportionately performed
on federal healthcare program beneficiaries.

OIG also noted the product standardization portion of the arrangement protected against
inappropriate reductions in services by ensuring that individual physicians still have
available the same selection of devices and supplies they had before the arrangement
became effective.

OIG found the financial incentives under the arrangement have been reasonably limited
in duration and amount. Moreover, “because each of the cardiology groups distributes its
profits to its members on a per capita basis, any incentive for an individual cardiologist to
generate disproportionate cost savings is mitigated,” OIG said.

OIG said its decision not to impose sanctions on the requestors was consistent with its
Special Advisory Bulletin (July 1999) entitled Gainsharing Arrangements and CMPs for
Hospital Payments to Physicians to Reduce or Limit Services to Beneficiaries. The
requestors' arrangement "is markedly different from 'gainsharing' plans that purport to
pay physicians a percentage of generalized cost savings not tied to specific, identifiable
cost-lowering activities," OIG said.

With regard to potential violations under the anti-kickback statute, OIG concluded that
several safeguards mitigated against the risks that the arrangement would be used to
attract referring physicians or to increase referrals from existing physicians.

OIG highlighted that participation in the arrangement has been limited to cardiologists
already on the hospital’s medical staff, and that potential savings derived from
procedures for federal healthcare program beneficiaries have been capped based on the
physicians’ prior year’s admissions of such beneficiaries.

OIG also found the structure of the arrangement (i.e., groups’ physician members are the
sole participants in the arrangement) effectively eliminated the risk that it would be used
to reward other cardiologists or physicians who refer patients to the cardiology groups.

Advisory Opinion 08-15 (Dept. of Health and Human Servs. Office of Inspector Gen. Oct.
6, 2008).

OIG Approves Hospital's Proposal To Share Percentage Of Pay-
For-Performance Program Bonuses With Physician-Owned Entity
The Department of Health and Human Services Office of Inspector General (OIG) has
given the green light to a hospital’s proposed arrangement to change its pay-for-
performance program to share with a physician-owned entity a percentage of the bonus
compensation it receives from a private insurer for meeting certain quality targets,
according to an advisory opinion posted October 14, 2008.

According to OIG, the proposed arrangement could constitute an improper payment to a
physician to induce reduction or limitation of services to Medicare or Medicaid
beneficiaries under the physician’s direct care, thereby triggering the civil monetary
penalty (CMP) provision set forth in §§ 1128A(b)(1)-(2) of the Social Security Act (Act).

In addition, OIG said that the proposed arrangement could potentially generate
prohibited remuneration under the anti-kickback statute (§ 1128B(b) of the Act), which
prohibits payments to physicians for referring federal healthcare program business to a

OIG concluded, however, that it would not impose sanctions because the arrangement as
structured posed a low risk of fraud and abuse.

The requesting hospital participates in a pay-for-performance program implemented by a
private insurer, under which the insurer pays the requestor for the care of patients in a
given year (i.e., base compensation), as well as an additional percentage of the base
compensation (i.e., incentive payments) based on the extent to which the requestor
meets certain standards of quality and efficiency established by the insurer.

OIG explained that, to calculate the incentive payments to be received for complying with
“quality targets,” the private insurer takes into account not just those insured under its
plans, but all of the requestor’s inpatients (including Medicare and Medicaid beneficiaries)
having a designated condition or procedure.

Under the proposed arrangement, the requestor would enter into an agreement with a
physician-owned entity whose members are on the requestor’s medical staff. Pursuant to
that agreement the physician entity would require its members to undertake various
tasks to ensure that the quality targets are achieved, including developing policies and
procedures, conducting peer review, and auditing medical records.

The requestor would then pay the physician entity a percentage, not to exceed 50%, of
the incentive payments it receives from the private insurer for achieving the insurer’s
quality targets. The physician entity would then distribute its earnings under the
agreement to its members on a per capita basis.

At the outset of its analysis, OIG reiterated its long-standing concerns about gainsharing
programs or similar cost-savings arrangements such as the requestor’s pay-for-
performance proposal.

Nonetheless, OIG concluded that, although the incentive payments at issue implicated
the CMP, several features of the proposed arrangement provide sufficient safeguards
against patient and federal healthcare program abuse.

OIG first noted credible medical support that the proposed arrangement could improve
patient care and was not likely to adversely affect it.

Moreover, under the proposed arrangement, bonus compensation is not reduced for not
meeting a specific quality standard in medically inappropriate circumstances (i.e., where
applying the standard is contraindicated with regard to the particular patient).

In addition, the requester certified that it would monitor the quality targets throughout
the term of the agreement “to protect against inappropriate or limitations in patient care
of services,” OIG said.

The proposed arrangement also “clearly and separately” identifies the performance
measures that could result in incentive payments to the physician entity, OIG noted,
adding that such transparency allows for public scrutiny of and individual physician
accountability for any adverse effects of the proposed arrangement.

Turning to its anti-kickback concerns, OIG noted safeguards that mitigated against the
risks that the proposed arrangement would be used to attract referring physicians or to
increase referrals from physicians already on the requestor’s staff.

Among other safeguards, OIG highlighted that membership in the physician entity would
be limited to physicians who have been on the requestor’s medical staff for at least a

In addition, OIG said that the per capita distribution of the incentive payments among the
members of the physician entity would reduce the risk that the proposed arrangement
might be used to reward individual physicians to refer patients to the requestor.

Advisory Opinion 08-16 (Dept. of Health and Human Servs. Office of Inspector Gen. Oct.
7, 2008).

OIG OKs Suppliers’ Proposal To Place DMEPOS Inventory Onsite
At Hospitals, Provide Training, Education On Prescribed
Two suppliers of durable medical equipment, prosthetics, orthotics, and supplies
(DMEPOS) would not be subject to administrative sanctions in connection with a proposal
to place inventory of DMEPOS in consignment closets onsite at certain hospitals, the
Department of Health and Human Services Office of Inspector General (OIG) said in an
advisory opinion posted November 26, 2008.

The OIG also found no anti-kickback issues regarding the other aspect of the suppliers’
proposal to have licensed personnel on-call or onsite at the hospitals to train and educate
patients who have been prescribed respiratory equipment and have selected one of the
companies as their supplier upon discharge to their homes.

According to the OIG, the proposal would not generate prohibited remuneration under the
Anti-Kickback Statute.

The suppliers proposed entering into written agreements with various hospitals allowing
them to place inventory onsite at the hospitals. The suppliers certified that they would
not pay any remuneration to the hospitals for the use of the consignment closets.

The suppliers would be identified as the DMEPOS supplier used by the hospitals, but
patients would be free to select any supplier.

For respiratory equipment, the suppliers also would provide licensed personnel, such as
respiratory therapists or registered nurses, on-call or onsite at the hospitals to train and
educate patients who had selected the suppliers.

The suppliers indicated the licensed personnel would perform training, education, and
coordination of care services to comply with final DMEPOS Quality Standards issued in
October 2008 by the Centers for Medicare and Medicaid Services (CMS).

The hospitals would provide the licensed personnel with a desk and telephone at no
charge to the suppliers.

The OIG acknowledged its long-standing concern about aggressive marketing by DMEPOS
suppliers, and the potential these activities have for fraud and abuse.

Notwithstanding these concerns, however, the OIG said the instant proposal did not
implicate the Anti-Kickback Statute under the circumstances.

The OIG highlighted that hospitals would provide the consignment closets to the suppliers
at no cost, and no remuneration would flow from the suppliers to the hospitals, i.e.
potential referral sources, for the desks or telephone services given to the licensed

“In short, under the Proposed Arrangement, the remuneration (the free telephones,
desks, and consignment closets) and the referrals run the same way.”

Finally, the OIG noted the services provided by the licensed personnel would consist only
of those necessary to comply with the quality standards issued by CMS. These individuals
would not provide any services that the hospitals were otherwise obligated to provide
such as discharge planning or case management.

Advisory Opinion No. 08-20 (Dep’t Health and Human Servs. Office Inspector Gen. Nov.
19, 2008).

OIG Greenlights Gainsharing Arrangement Between Hospital And
Cardiology Groups
Although an existing gainsharing arrangement between a hospital and four cardiology
groups has the potential for resulting in improper payments to induce reduction or
limitation of services or prohibited remuneration, the Department of Health and Human
Services Office of Inspector General (OIG) said in an advisory opinion posted December
8, 2008 that it would not impose sanctions because sufficient safeguards existed to
mitigate fraud and abuse risks.

Under the arrangement, the hospital agreed to pay each of four cardiology groups, as
well as a radiology group, a share of cost savings directly attributable to specific changes
in that particular group’s cardiac catheterization practices over two years. The hospital
and groups in the arrangement (Requestors) began implementing the specific changes in
these practices prior to requesting the advisory opinion.

The changes were based on 27 recommendations from a study of historical practices of
the groups with respect to cardiac catheterization procedures performed at the hospital.

The recommendations are grouped in three general categories: product standardization,
“use as needed” devices, and product substitutions.

In relation to product standardization, the report recommended that the groups
standardize the types of cardiac catheterization devices and supplies (i.e., stents,
balloons, guidewires and catheters, diagnostic devices, pacemakers, etc.) that they
employ, and to identify preferred vendors and products.

The arrangement also called for limiting the use of certain devices to an “as needed”
basis for cardiac interventional and diagnostic procedures, and for substituting, as
appropriate, less costly contract agents and anti-thrombotic medications for other
products being used by the physicians.

In determining that it would not impose sanctions, the OIG noted the arrangement
contained several safeguards intended to protect against inappropriate reductions in

“Importantly, with respect to the product standardization, use as needed
recommendation, and product substitution, the Requestors certified that the individual
physicians made a patient-by-patient determination of the most appropriate device or
supply and the availability of the full range of devices and supplies was not compromised
by the product standardization, use as needed recommendation, or product substitution,”
the OIG said.

The OIG listed other features of the arrangement that, in combination, amounted to
sufficient safeguards to mitigate unlawful activity under fraud and abuse laws, including
the Anti-Kickback Statute.

First, the OIG said that specific cost-saving actions and resulting savings were clearly and
separately identified in the arrangement, and that transparency of the arrangement
allows for scrutiny and individual physician accountability for any adverse effects.

In addition, the Requestors submitted credible medical evidence for the position that
implementation of the recommendations did not adversely affect patient care, the opinion

With respect to compensation to the various groups in the arrangement, the opinion
highlighted that the amounts to be paid were calculated based on all procedures
performed, regardless of patients’ insurance coverage. In addition, the procedures to
which the arrangement applied were not disproportionately performed on federal
healthcare program beneficiaries.

The OIG said the arrangement further protected against inappropriate reductions in
services by ensuring that individual physicians still had access to the same selection of
devices and supplies after implementation of the arrangement as before.

In addition, the financial incentives under the arrangement were reasonably limited in
duration (two years) and amount, and any incentive for an individual physician to
generate disproportionate cost savings was mitigated because each of the groups
distributes profits to its members on a per capita basis, the opinion said.

The OIG also determined the structure of the arrangement eliminated the risks that it will
be used to reward surgeons or other physicians who refer patients to the groups or their

“The Groups were the sole participants in the Arrangement and were composed entirely
of cardiologists and interventional radiologists; no surgeons or other physicians are
members of the Groups or will share in their profit distributions,” the OIG said.

The OIG cautioned, however, that “[o]ther arrangements, including those that are longer
in duration and more expansive in scope, are likely to require additional or different

Advisory Opinion 08-21 (Department of Health and Human Servs. Office of Inspector
Gen. Nov. 25, 2008).

OIG Says Physician Group May Employ Part-Time Physicians For
A physician group's proposal to employ part-time two physicians to perform endoscopies
would not generate prohibited remuneration under the Anti-Kickback Statute, the
Department of Health and Human Services Office of Inspector General (OIG) said in an
advisory opinion posted December 15, 2008.

The requestor of the opinion is a nonprofit, tax-exempt corporation that meets all the
criteria of a "physician group" set out in 42 C.F.R. § 411.352, OIG explained. The
requestor proposes to employ two physicians on a part-time basis to perform
endoscopies on the requestor’s premises.

Each of the proposed part-time physicians also has a separate medical practice, at
separate premises, where he or she will continue to see patients outside the part-time
employment relationship with the requestor. In addition, the requestor said it will pay
each physician a salary that will be based on the fair market value of the professional
services that he or she personally provides while employed by the requestor.

OIG noted that the Anti-Kickback Statute does not prohibit payments made by employers
to their bona fide employees for employment in the furnishing of items or services for
which payment may be made under Medicare, Medicaid, or other federal healthcare

OIG said for the purposes of its opinion it would rely on the requestor's certification that
the physicians are bona fide employees.

According to the opinion, because the requestor also certified that the part-time
physicians will be employed to perform endoscopies, which are services for which
payment may be made in whole or in part under Medicare, Medicaid, or other federal
healthcare programs, and that the compensation they will receive will be for professional
services they personally perform, the Proposed Arrangement would satisfy the criteria set
forth in section 1128B(b)(3)(B) of the Act and 42 C.F.R. § 1001.952(i).

Therefore, the wages paid to the physicians by the requestor "would not constitute
prohibited remuneration under the anti-kickback statute," OIG said.

The opinion noted, however, that if the part-time physicians are not bona fide employees,
its opinion "is without force and effect."

Advisory Opinion No. 08-22 (Dept. Health and Human Servs. Office of Inspector Gen.
Dec. 8, 2008).

CMS Issues Advisory Opinion Finding Arrangement Satisfies Stark
Rural Provider Exception
The Centers for Medicare and Medicaid Services (CMS) issued a favorable advisory
opinion finding an arrangement in which certain physician-owners of a diagnostic center
refer patients to the center for designated health services (DHS) satisfies the rural
provider exception to the physician self-referral prohibition.

According to the facts set forth in the redacted opinion, the diagnostic center offers a
variety of services, including physician consultation on a walk-in and urgent care basis,
as well as ancillary services such as clinical laboratory services and diagnostic radiology

The physician-investors have made and will continue to make referrals of Medicare
patients to the center for these services, the opinion noted.

CMS concluded that, under the facts certified by the requestors, the arrangement
qualified for the rural provider exception to the Stark Law. See 42 C.F.R. §

At the outset of its analysis, CMS emphasized that the rural provider exception applies
only to ownership or investment interests in a DHS entity.

CMS found the ownership-investment interest in the diagnostic center at issue met the
two-part test to qualify for the rural provider exception—namely, that the DHS is
furnished in a rural area and that “substantially all” (i.e., at least 75%) of the DHS
furnished by the entity is to individuals residing in a rural area.

Because the county where the center is located is not listed as a metropolitan statistical
area (MSA), by definition, it is considered to be a rural area, CMS said.

Moreover, requestors certified that, on an annual basis, at least 75% of the designated
health services provided by the center have been, and will continue to be, furnished to
individuals outside of a MSA.

“We caution, however, that the ‘substantially all’ test is an ongoing requirement,” CMS
noted. The agency also stressed that the rural provider exception would only apply to the
extent the diagnostic center continued to furnish services outside the boundaries of a

Advisory Opinion No. CMS-AO-2008-02.

OIG Issues “Open Letter” Narrowing Scope Of Self-Disclosure For
Self Referral Issues
The Department of Health and Human Services Office of Inspector General (OIG) issued
March 24, 2009 an “open letter” to healthcare providers indicating OIG will no longer
accept into the Self-Disclosure Protocol (SDP) issues that involve only liability under the
physician self referral (Stark) Law in the absence of a colorable Anti-Kickback Statute
(AKS) violation.

The letter, signed by Inspector General Daniel R. Levinson, says the refinements are
intended to focus OIG resources on kickbacks intended to induce or reward a physician's

On April 24, 2006, OIG issued an open letter promoting the use of the SDP to resolve civil
monetary penalty (CMP) liability under Stark and the AKS for financial arrangements
between hospitals and physicians.

The letter issued this week cautions that while OIG is narrowing the SDP’s scope for
“resource purposes,” providers should not “draw any inferences about the Government’s
approach to enforcement of the physician self-referral law.”

The letter also establishes a minimum $50,000 settlement amount for kickback issues,
effective March 24, 2009, to be accepted into the SDP.

“We will continue to analyze the facts and circumstances of each disclosure to determine
the appropriate settlement amount consistent with our practice, stated in the 2006 Open
Letter, of generally resolving the matter near the lower end of the damages continuum,
i.e., a multiplier of the value of the financial benefit conferred.”

U.S. Court In Colorado Finds No Jurisdiction In Challenge To
Revised “Entity” Definition Under Stark
The U.S. District Court for the District of Colorado said it lacked subject matter
jurisdiction to consider whether CMS’ broadened definition of when an “entity” furnishes
designated health services (DHS) was an impermissible construction of the Stark Law.

The court found plaintiffs in the case—physicians and physician-owned entities—could
have their claim heard administratively, albeit indirectly, through the hospitals with which
they contract “under arrangement.”

Thus, federal question jurisdiction was barred under 42 U.S.C. § 405(h) because
administrative channels were available to consider plaintiffs’ claim.

At issue was a change in CMS’ interpretation of the Stark Law regarding when an “entity”
furnishes DHS for purposes of the physician self-referral prohibition.

Plaintiffs, which provide DHS under contract with hospitals in Colorado, include cath labs
and their physician owners.

Medicare rules permit only a hospital to bill for the cardiac catheterization services
performed by the cath labs. As a result, the cath labs provide their services to hospitals
"under arrangements" in which the hospitals contract with the cath labs to provide
"nursing and technical personnel, equipment, drugs, and medical supplies."

Under current regulations, only the hospital—i.e., the billing entity—is considered to be
furnishing DHS; thus, individual physician plaintiffs can lawfully refer their Medicare
patients to entities they own. 42 C.F.R. § 411.351.

Effective October 1, 2009, however, physician-owned entities that provide DHS “under
arrangements” with the hospitals also will be considered to be furnishing DHS and will be
prohibited from making referrals to their own cath labs absent an applicable exception.
See 73 Fed. Reg. 48434, 48751 (Aug. 19, 2008).

Plaintiffs filed an action in court seeking a declaration that CMS’ new interpretation of
entities furnishing DHS is unlawful.

Citing American Chiropractic Ass’n, Inc. v. Leavitt, 431 F.3d 812 (D.C. Cir. 2005), the
court concluded that it lacked subject matter jurisdiction to consider the challenge.

Plaintiffs argued that an exception to the requirement that all claims arising under the
Medicare Act must be channeled through the administrative process applied--i.e., that
they could only obtain judicial review through a federal question suit.

Although plaintiffs could not bring an administrative challenge before CMS because
they did not directly bill or receive payments from Medicare for DHS, the hospitals with
which they contract could do so "if they so chose," the court observed.

In American Chiropractic, the D.C. Circuit found an association of chiropractors could not
challenge in court a Medicare regulation that permitted health maintenance organizations
(HMOs) to require patients to obtain a referral from a doctor or osteopath to receive
covered chiropractic services because the chiropractors could have their claim heard
administratively indirectly through a patient filing a grievance with their HMO.

“Like the chiropractors in American Chiropractic whose claims could be heard indirectly
through their patients, the physicians and physician-owned Cath Labs here could have
their claim heard indirectly through a hospital with which they contract,” the
court reasoned.

The court rejected plaintiffs’ attempt to distinguish American Chiropractic on the basis
that the association of chiropractors could “get its claim heard” because its members had
direct access to administrative review as the assignee of their patients.

“Plaintiffs’ lack of a direct avenue to administrative review through an assignment does
not mean that they could not get their claim heard,” the court said.

Plaintiffs also contended the hospitals were not adequate proxies because they had no
incentive to channel the claim administratively and faced other roadblocks in doing so.

Again citing American Chiropractic, the court noted that the D.C. Circuit never considered
whether the chiropractors’ patients were adequate proxies, only “that chiropractors could
receive an administrative decision on the issue presented.”

In any event, the court concluded the hospitals did have adequate incentives to file an
administrative claim "because the Cath Labs provide the cardiac catherization services 'at
a lower cost than could be provided by the hospitals' and 'the hospitals profit by having
these services furnished under arrangement.'"

Colorado Heart Inst., LLC v. Johnson, No. 08-1626 (RMC) (D.D.C. Apr. 20, 2009).

Other Developments
OIG Says Some Physicians Ordering Magnetic Resonance Services
May Have Conflict
One-quarter of magnetic resonance (MR) services paid under the Medicare physician fee
schedule (MPFS) in 2005 were “connected service”—i.e. services ordered by physicians
who were connected to the parties that provided them, the Department of Health and
Human Services Office of Inspector General (OIG) said in a recent report.

The report, Provider Relationships and the Use of Magnetic Resonance Under the
Medicare Physician Fee Schedule, details a study, based on 2005 Medicare Part B claims
data and projections of data from a sample of MR services, to determine whether certain
relationships among providers were associated with high use of services.

According to the OIG, “[c]onnected services were associated with high use.” Specifically,
high users of MR ordered 55% of connected services, the OIG reported, compared to
33% of services that were not connected.

The OIG also found connected services were more likely to have been ordered by
orthopedic surgeons. Specifically, orthopedic surgeons ordered 28% of connected
services, compared to 15% of all other services.

As more MR services are performed in settings covered by the MPFS, “doctors are
increasingly in a position to order services from parties with which they have a medical
practice or other business relationship,” the OIG noted.

“In these circumstances, doctors may have conflicts of interest, financial or otherwise,”
the OIG concluded.

The OIG also said the report’s findings illustrate how the complexity in which MR services
are performed and billed under the MPFS reduces transparency and ultimately warrants
further oversight.

“Although the analysis in this report was limited to MR, it is possible that such complexity
extends to other types of high-cost imaging paid under the MPFS,” the OIG added.

The Centers for Medicare and Medicaid Services (CMS) agreed that the complexity of MR
services warranted continued attention.

In commenting on the report, CMS outlined a number of regulatory steps it has taken to
curb overutilization of diagnostic testing services, including expanding the antimarkup
provision to the professional component of services and seeking public comment on the
in-office ancillary exception to the physician self-referral law.

DOJ Recovers $1.12 Billion In Healthcare Fraud Settlements And
Judgments In FY 2008
The federal government recovered $1.12 billion in healthcare fraud settlements and
judgments in fiscal year (FY) 2008, accounting for the vast majority of the $1.34 billion in
total fraud and false claims recoveries (including defense procurement fraud) for that
year, the U.S. Department of Justice (DOJ) announced in a November 10 , 2008 press

Most of these recoveries, about 78%, stemmed from lawsuits generated by qui tam
relators under the False Claims Act (FCA), DOJ said. For the fiscal year ending
September 30, 2008, relators were awarded a total of $198 million, according to the

As with the last several years, healthcare fraud represented “the lion’s share” of the
federal government’s total fraud and false claims recoveries, with the Department of
Health and Human Services (HHS) obtaining the biggest recoveries, the release said.

DOJ indicated that since 1986, healthcare fraud recoveries have totaled nearly $4 billion.

The largest healthcare fraud recoveries this year involved pharmaceutical companies and
related entities, according to the release.

“Settlements with Cephalon Inc., Merck & Co. and CVS Caremark Corp. accounted for
more than $640 million,” the release said. In addition, similar “fraud cases returned $430
million to state Medicaid programs.”

Many significant recoveries involved so-called “off-label” marketing, which is the illegal
promotion of drugs or devices that are billed to Medicare and other federal healthcare
programs for uses not approved by the Food and Drug Administration.

Other allegations involving pharmaceutical companies included paying kickbacks to
physicians, wholesalers, and pharmacies to induce drug or device purchases; establishing
inflated drug prices and then marketing the “spread” between federal reimbursement
based on these inflated prices and the provider’s lower cost to induce drug purchases;
and knowingly failing to report the true “best price” for a drug to reduce rebates to the
Medicaid program.

OIG, DOJ Release Annual Tally Of Antifraud Efforts
The Department of Health and Human Services Office of Inspector General (OIG) and the
Department of Justice (DOJ) released December 2, 2008 the Health Care Fraud and
Abuse Control Program (HCFAC) Annual Report for fiscal year (FY) 2007.

According to the report, in FY 2007, the government won or negotiated approximately
$1.8 billion in judgments and settlements.

In addition, the Medicare Trust Fund received transfers of roughly $797 million in FY
2007, while $266 million in federal Medicaid money was transferred to the U.S. Treasury
as a result of antifraud efforts.

U.S. Attorneys Offices opened 878 new criminal healthcare fraud investigations involving
1,598 potential defendants, the report said. Federal prosecutors had 1,612 healthcare
fraud criminal investigations pending, involving 2,603 potential defendants, and filed
criminal charges in 434 cases involving 786 defendants.

A total of 560 defendants were convicted for healthcare fraud-related crimes during

In addition, DOJ opened 776 new civil healthcare fraud investigations, and had 743 civil
healthcare fraud investigations pending at the end of the fiscal year. DOJ opened 218
new civil healthcare fraud cases during the year, according to the report.

The HCFAC, which was established by the Health Insurance Portability and Accountability
Act, is under the joint direction of DOJ and the OIG.

OIG Reports Over $20 Billion In Savings And Recoveries For FY
The Department of Health and Human Services (HHS) Office of Inspector General (OIG)
announced December 3, 2008 savings and expected recoveries of more than $20.4 billion
for fiscal year (FY) 2008.

According to OIG’s Semiannual Report to Congress, the over $20 billion saved or
recovered includes $16.72 billion in implemented recommendations to put funds to better
use, $1.33 billion in audit receivables, and $2.35 billion in investigative receivables.

Also in FY 2008, OIG excluded from participation in federal healthcare programs 3,129
individuals and organizations for convictions for healthcare-related crimes and for patient
abuse or neglect or as a result of license revocation.

Some notable settlements highlighted in the report include Cephalon, Inc., which agreed
to pay $375 million plus interest to resolve its False Claims Act (FCA) liability for the off-
label marketing of the drugs Actiq, Gabitril, and Provigil; and Merck and Company, Inc.,
which agreed to pay more than $650 million to resolve claims of fraudulent price
reporting and kickbacks.

OIG noted that it allocates about 80% of its resources to work related to the Centers for
Medicare and Medicaid Services (CMS), as CMS’ expenditures account for more than 80%
of HHS’ budget.

CMS Finalizes Surety Bond Regulation For DMEPOS Suppliers,
Announces Other Steps To Curb Fraud
Certain existing suppliers of durable medical equipment will have until October 2, 2009 to
post a $50,000 surety bond to participate in Medicare under a final regulation announced
by the Centers for Medicare and Medicaid Services (CMS) on December 29, 2009.

The final regulation, mandated by the Balanced Budget Act of 1997, requires new
suppliers of durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) to
comply with the surety bond requirement by May 4, 2009.

Suppliers that have faced adverse legal actions in the past also may be required to post a
higher amount, CMS said. An earlier proposal had set the baseline surety bond amount at

Some suppliers are specifically exempted from the surety bond requirement, including
certain physicians and non-physician practitioners, physical and occupational therapists,
state-licensed orthotic and prosthetic personnel, and government-owned suppliers.

The move is the agency’s latest to crack down on fraud and abuse involving durable
medical equipment, which has been the subject of significant scrutiny over the last
several years.

CMS also said it has revoked billing privileges of 1,139 DMEPOS suppliers as part of a
demonstration focusing on suppliers in South Florida and Los Angeles, long considered a
hotbed of fraudulent activities.

According to CMS, the suppliers, who were paid a combined total of $265 million between
calendar years 2005 and 2007, lost their billing privileges for not re-enrolling in the
Medicare program and not meeting Medicare’s supplier standards.

Meanwhile, CMS also announced payment suspensions to home health agencies in the
Miami-Dade, Florida area.

In addition to the payment suspensions, CMS indicated a number of other steps aimed at
curbing fraud and abuse by home health agencies, including implementing extensive pre-
and post-payment review of claims submitted by ordering/referring physicians; validating

claims by physicians who order a high number of certain items or services; and
identifying and visiting high-risk beneficiaries to ensure they are receiving the services
for which Medicare is billed.

ALJ Affirms 15-Year Exclusion Of Top Executives In OxyContin
An Administrative Law Judge (ALJ) recently upheld a 15-year exclusion from all federal
healthcare programs imposed on three former executives of Purdue Frederick after
they each pleaded guilty to misdemeanor misbranding of the drug OxyContin, the
Department of Health and Human Services Office of Inspector General (OIG) announced
January 23, 2009.

The three former corporate officers, Michael Friedman, who served as Chief Operating
Officer and then Chief Executive Officer, Dr. Paul Goldenheim, who served as Chief
Scientific Officer, and Howard Udell, who served as General Counsel, entered into their
guilty pleas at the same time Purdue Frederick and its affiliate Purdue Pharma pleaded
guilty to felony misbranding of OxyContin.

The companies agreed in 2007 to pay $600 million to resolve civil and criminal liabilities
concerning claims that they trained their sales force to represent to healthcare providers
that OxyContin did not cause euphoria and was less addictive than immediate-release

As a result of the three executives’ guilty pleas, OIG excluded them from participating in
federal healthcare programs for 15 years, citing their failure as responsible corporate
officers to prevent misbranding and fraudulent distribution of OxyContin.

In a January 9, 2009 decision upholding the exclusion, ALJ Carolyn Cozad Hughes noted
the costs to government programs and individuals were “astronomical” and that
Friedman, Goldenheim, and Udell’s offenses “endangered the health and safety of
program beneficiaries and others.”

New York State Announces $551 Million In Medicaid Recoveries
New York State recovered $551 million in improperly paid Medicaid funds in federal fiscal
year 2008, more than double the Medicaid fund recovery targets set under the Federal-
State Health Reform Partnership (F-SHRP), Governor David A. Paterson announced
December 12, 2008.

“To understand the significance of this success, consider this: the total that all 50 states
recovered in 2007 was $305 million. New York is leading the way in fighting not only
against Medicaid fraud but waste and abuse of the system as well,” said New York State
Medicaid Inspector General James G. Sheehan, who joined Paterson in making the

The Office of the Medicaid Inspector General (OMIG) works in partnership with the
Department of Health, the New York State Office of the Attorney General Medicaid Fraud
Control Unit, the Office of Temporary Disability Assistance, the Office of Mental Health,
the Office of Alcoholism and Substance Abuse Services, and the Office of Mental
Retardation and Developmental Disabilities.

The OMIG was established in the fall of 2006 and receives federal funding for some of its
efforts under the F-SHRP, which required the state to meet a series of conditions,
including a Medicaid recovery target of $215 million for federal fiscal year 2008 .

NY Medicaid IG Issues Self-Disclosure Guidance
The New York Office of the Medicaid Inspector General (OMIG) issued March 12, 2009
guidance for providers that discover improper Medicaid payments and want to self-
disclose those issues to the OMIG.

OMIG says it developed the self-disclosure approach “to encourage and offer incentives
for providers to investigate and report matters that involve possible fraud, waste, abuse,
or inappropriate payment of funds—whether intentional or unintentional—under the
state’s Medicaid program.”

The guidance replaces the existing Department of Health disclosure protocol and
establishes the process for participating in the OMIG’s Self-Disclosure Program.

In an introductory section, the OMIG says the guidance is intended to be significantly
more expansive in scope than the U.S. Department of Health and Human Services Office
of Inspector General’s (HHS OIG's) protocol.

“The OMIG recognizes that situations which are subject to this guidance could vary
significantly; therefore, this protocol is written in general terms to allow providers the
flexibility to address the unique aspects of the matters disclosed.”

In the guidance, OMIG says typical benefits associated with self-disclosure would
include forgiveness or reduction of interest payments, extended repayment terms, and
possible preclusion of subsequently filed qui tam actions under the state's false claims act
based on the disclosed matters to providers who self-disclose in good faith.

OMIG cites a number of issues that may be appropriate for disclosure such as substantial
routine errors, systematic errors, patterns of errors, and potential violations of fraud and
abuse laws.

The guidance sets forth the process for self-disclosure, including specifying what an initial
report should contain and potential next steps once a self-disclosure is made.

OMIG also indicates its commitment to obtain relevant facts and evidence without
interfering with a provider’s attorney-client privilege or work-product protection.

OMIG provides a printable version of its self-disclosure form, which is available online.

Healthcare Reform

Baucus Issues Blueprint For Healthcare Reform
Senate Finance Committee Chairman Max Baucus (D-MT) issued November 12, 2008 a
comprehensive proposal for revamping the nation’s healthcare system.

The “Call to Action,” set forth in a white paper that took a year to prepare, provides
specific policy options for Congress to consider in 2009, with the underlying objective of
achieving universal health coverage, reducing healthcare costs, and improving quality,
according to a press release Baucus posted.

Although Baucus said the white paper is not intended as a legislative proposal, he
indicated plans to introduce comprehensive health reform legislation in the first half of

“We can’t get coverage to the 61 million who are either uninsured or underinsured
without a major overhaul of the system, and there’s no way to really solve America’s
economic troubles without fixing health care for the long term,” Baucus argued.

While acknowledging that many components of the plan would require upfront
investments, Baucus said in the paper that a comprehensive overhaul of the healthcare
system would reap lasting benefits, including improving quality, reducing costs,
and putting the system "on a more sustainable path."

The white paper is divided into four chapters. After making the case for reform in the first
chapter, the next three address increasing access to affordable health coverage;
improving value by reforming healthcare delivery; and financing a more efficient
healthcare system.

Universal Coverage

To achieve universal coverage, Baucus’ plan would create a nationwide insurance pool
called the Health Insurance Exchange to help ensure individuals and small businesses can
access affordable coverage. Private insurers offering coverage through the Exchange
would be barred from discriminating based on pre-existing conditions.

Citing healthcare reforms put in place in Massachusetts, the plan calls for an individual
mandate to have health coverage. “This step is necessary for insurance market reforms
to function properly and to end the cost-shifting that occurs within the system,” according
to a summary of the proposal.

Baucus’ plan also would require employers (except small firms) to contribute to a fund
that would help cover the uninsured if the employers choose not to provide coverage

According to the paper, the contribution would likely be based on a percentage of payroll
that took into account the size and annual revenues of the firm. The Baucus plan also
envisions a targeted tax credit that small firms could use towards the cost of purchasing
healthcare coverage.

Another key component of Baucus' proposal is expanding access to public healthcare
programs. For example, the plan would make healthcare coverage immediately available
to Americans aged 55 to 64 through a Medicare buy-in. According to the plan, the buy-in
option would be temporary until the Exchange was up and running.

The plan also would make Medicaid available to every American living below the poverty
level. In addition, the plan would increase the federal medical assistance percentage for
states facing economic crisis.

Improving Quality and Value

To improve quality and value, the plan calls for strengthening the role of primary care
and chronic care management.

Baucus’ plan also emphasizes the need to realign payment incentives. Among the key
steps in this process is “[f]ixing the unstable and unsustainable Medicare physician
payment formula.”

In addition, the plan calls for additional investments in new comparative effectiveness
research and health information technology.

Greater Efficiency

In terms of achieving greater efficiency and sustainable financing, the Baucus plan
endorses a number of steps aimed at: curbing fraud, waste, and abuse; addressing
overpayments to private insurers in Medicare Advantage programs; increasing
transparency and requiring disclosure of payments and incentives to providers by drug or
device makers; reforming medical malpractice laws; considering policies to shift the focus
in long term care from institutional to home and community-based settings; and
exploring targeted reforms of the tax code.


A number of groups and lawmakers reacted favorably to Baucus' proposal and signaled
their willingness to play a role in the effort to overhaul the healthcare system.

In a statement, House Ways and Means Committee Chairman Charles B. Rangel (D-NY)
and Subcommittee on Health Chairman Pete Stark (D-CA) said Baucus’ plan “supports a
number of principles we have pursued over time, including many of those on which
President-Elect Obama campaigned.”

Helen Darling, President of the National Business Group on Health, which represents
more than 300 large employers, agreed that "health care reform goes hand-in-hand with
addressing our nation's broader economic problems."

Consumers group Families USA noted that “[t]here has never been a more auspicious
opportunity to secure meaningful health care reform.”

But others sounded a cautionary note. "Dramatically expanding government spending
and putting additional pressure on employers already struggling to create jobs would
have repercussions that need to be carefully considered," said Senate Finance Committee
Ranking Member Charles Grassley (R-IA).

"It's not a time for rosy scenarios," Grassley added, "paying for health care reform needs
to be done in an intellectually honest way for the fiscal health of our country and the
broader the support for any health policy changes, the more durable and effective they
will be."

CBO Issues Report On Budget Options For Healthcare
The Congressional Budget Office (CBO) released December 18, 2008 a far-ranging report
examining budget options related to healthcare within federal programs and the
healthcare system.

The 235-page report examines 115 specific options for reducing (or in some cases,
increasing) federal spending on healthcare, altering federal healthcare programs, and
making substantive changes to the nation’s health insurance system.

The options are organized in broad chapters addressing, among other things, the private
health insurance market, the tax treatment of health insurance, changing the availability
of health insurance through existing federal programs, the quality and efficiency of
healthcare, geographic variation in Medicare spending, paying for Medicare services, and
long term care.

“Addressing healthcare issues will be crucial to closing the nation’s looming fiscal gap—
which is caused to a great extent by rising healthcare costs,” CBO said in the report.

According to CBO, without changes in federal law, spending on healthcare will rise from
16% of GDP in 2007 to 25% in 2025 and close to 50% in 2082.

CBO also released a companion report, Key Issues in Analyzing Major Health Insurance
Proposals, which focuses on large-scale proposals, rather than specific options, and their
potential impact on the healthcare system.

In the report, CBO projects that federal spending on Medicare and Medicaid will increase
from 4% of GDP in 2009 to nearly 6% in 2010 and 12% by 2050.

"Most of that increase will result from growth in per capita costs rather than from the
aging of the population," CBO said.

CBO noted that absent significant policy changes, an increasing number of nonelderly
individuals are likely to be uninsured.

"In considering such changes, policymakers face difficult trade-offs between the
objectives of expanding insurance coverage and controlling both federal and total costs
for health care," CBO observed.

New Study Blasts Massachusetts Healthcare Reform Model, Calls
For Single-Payor System
Massachusetts' far-reaching overhaul of its healthcare system is “deeply flawed” and
should not be used as a national model for reform, according to a study released
February 18, 2009 by Physicians for a National Health Program and Public Citizen.

The study advocated instead a single-payor system in which healthcare providers are
paid from a single government-administered fund.

The study said a single-payor system could save Massachusetts between $8 billion to $10
billion annually in reduced administrative costs.

According to the study, Massachusetts’ Plan: A Failed Model for Health Care Reform,
many low-income residents who previously received free care are now faced with co-
payments, premiums, and deductibles they cannot afford. The study also disputed that
the healthcare reform initiative had achieved near universal coverage in the state.

“We are facing a health-care crisis in this country because private insurers are driving up
costs with unnecessary overhead, bloated executive salaries and an unquenchable quest
for profits,” said Sidney Wolfe, M.D., director of Public Citizen’s Health Research Group.

“Massachusetts’ failed attempt at reform is little more than a repeat of experiments that
haven’t worked in other states. To repeat that model on a national scale would be
nothing short of Einstein’s definition of insanity,” he said.

The groups sent a letter, signed by 500 Massachusetts physicians and health
professionals, to Senate Health, Education, Labor and Pensions Committee Chairman
Edward Kennedy (D-MA) urging him to consider “the simplicity, cost effectiveness and
humanity of a single-payer plan,” saying it could be implemented fairly easily like

The letter asked Kennedy to introduce legislation based on the United States National
Health Care Act (H.R. 676) introduced in the 110th Congress, which would implement
single-payor financing of healthcare while maintaining a private delivery system.

The groups also sent a letter to President Obama, signed by various labor leaders from
Massachusetts, also urging national healthcare reform modeled on H.R. 676.

“The chief problem with the Massachusetts plan is that it leaves private insurance
companies at the center of the system through an individual mandate and expensive
public subsidies supported by taxes for plans that still don’t provide enough coverage,”
the letter said.

President Obama’s Budget Includes $634 Billion Fund For
Healthcare Reforms
President Barack Obama released February 26, 2009 a summary of his fiscal year (FY)
2010 budget, which creates a $634 billion reserve fund over the next decade for
financing healthcare reform.

The new administration characterized the fund, which would be paid for through a
combination of tax revenue and reductions in Medicare and Medicaid spending, as a
“down payment” on comprehensive healthcare reform, acknowledging “additional funding
will be needed.”

The administration’s FY 2010 budget blueprint, with a more detailed plan anticipated in
the spring, follows on the heels of President Obama’s remarks February 24, 2009 to a
joint session of Congress in which he emphasized the importance of healthcare reform to
the nation’s overall economic recovery.

“[T]he cost of our healthcare has weighed down our economy and the conscience of our
nation long enough. So let there be no doubt health care reform cannot wait, it must not
wait, and it will not wait another year,” Obama said.

In releasing his budget plan, Obama added that “crushing health care costs . . . represent
the fastest-growth part of our budget” and that comprehensive reform is critical to a
sustained financial recovery.

The administration said about $318 billion of the reserve fund would come from tax
increases on the country's top earners, defined as individuals making more than
$200,000 annually or families making more than $250,000 per year.

Another $316 billion would flow from savings in spending on Medicare and Medicaid,
according to budget documents.

In a statement, Senate Health, Education, Labor and Pensions Committee Ranking
Member Mike Enzi (R-WY) expressed concern that the President's healthcare proposals in
his budget outline could signal his intent to push through a specific agenda and could
"undercut the will of Congress as it works to develop a bipartisan reform bill."

"Reform legislation must be about more than just expanding coverage; we need to get to
the root of the problem by changing the health care delivery system to encourage better
value and reduce costs," he said.

But Senate Finance Committee Chairman Max Baucus (D-MT) viewed the President's
budget proposal as a "launching pad to move forward" on vital healthcare reform

Medicare Advantage

A large chunk of the health savings under the plan, about $175 billion, would come from
implementing a competitive payment system for Medicare Advantage (MA) plans.

According to budget documents, the federal government pays MA plans 14% more on
average than what it spends on beneficiaries in traditional fee-for-service Medicare.

Under the competitive bidding model, payments would be based on an average of plans’
bids submitted to Medicare.

While supporting the President’s “bold framework” for jump-starting healthcare reform,
the America’s Health Insurance Plans (AHIP) said the administration’s proposal “would
force seniors enrolled in Medicare Advantage to fund a disproportionate share of the costs
to reform the health care system.”

According to AHIP, “[a] cut of this scale would jeopardize the health security of more
than ten million seniors enrolled in Medicare Advantage and would turn back the clock on
innovative payment incentives to improve the quality of care that patients receive."

Enzi also took aim at the President's proposal, saying it undercuts his campaign promise
that Americans who are satisfied with their health insurance would be able to keep their
existing plans.

The Medicare Rights Center, however, lauded the proposed reductions in MA payments,
saying Medicare, in recent years, "has become a cash cow for insurance companies,
providing taxpayer subsidies that far exceed the cost of providing coverage through
Original Medicare."

Hospital Readmissions, Pay-for-Performance

The budget plan also calls for roughly $26 billion in savings by reducing hospital
readmission rates for Medicare beneficiaries, which the administration pegged at about
18%, through a combination of incentives and penalties.

Specifically, the plan would bundle payments to hospitals that cover not just the initial
hospitalization, but also care from certain post-acute providers the 30 days after the

In addition, hospitals with high rates of readmission would be paid less from Medicare if
patients are re-admitted to the hospital within the same 30-day period.

Another proposal, producing an estimated $12 billion in savings, would link a portion of
Medicare payments for acute in-patient hospital services to hospitals’ performance on
specific quality measures.

Drug Prices

The administration said in its budget proposal that it supports efforts to create a clear
regulatory pathway for approving follow-on generics of biotechnology products.

According to budget documents, brand name manufacturers would still have a
guaranteed period of exclusivity but would be prohibited from reformulating existing
products to restart the exclusivity process.

In a statement, Biotechnology Industry Organization (BIO) President and CEO Jim
Greenwood said the group supports the President's call for a regulatory pathway for
biosimilars, but emphasized the need to "preserv[e] the incentives necessary for the
development of new therapies and treatment as well as research leading to significant
second generation improvements in safety and efficacy to innovative products."

The budget outline further signaled the administration's support for new efforts by the
Food and Drug Administration "to allow Americans to buy safe and effective drugs from
other countries" as a way to help lower costs.

The budget also contemplates lowering Medicaid drug costs by increasing the Medicaid
drug rebate for brand-name drugs from 15.1% to 22.1% of the Average Manufacturer
Price and allowing states to collect rebates on drugs provided through Medicaid managed
care organizations.

Physician Payments

The administration's budget expressed its support for "comprehensive, but fiscally
responsible reforms to the [Medicare physician] payment formula” as part of healthcare
reform efforts.

According to the administration, Medicare needs “to move toward a system in which
doctors face better incentives for high-quality care rather than simply more care."

“President Obama’s budget proposal takes a huge step forward to ensure that physicians
can care for seniors by rejecting planned Medicare physician payment cuts of 40 percent
over the next decade. Looming widespread physician shortages coupled with aging baby
boomers highlight the urgent need for permanent Medicare physician payment system
reform to preserve seniors’ access to health care,” the American Medical Association said
in a statement.

Obama Lays Out Ambitious Agenda For Health Reform
President Obama emphasized his commitment to healthcare reform at a March 5, 2009
White House Forum on Health Reform where he stressed his goal to enact healthcare
reform by the end of the year.

Obama said current healthcare reform efforts have a better chance of success than in the
past because "the call for reform is coming from the bottom up."

The White House forum was aimed at bringing together key stakeholders to hash out
potential next steps for moving forward with healthcare reform.

A number of Republicans, however, remained vocal critics of Obama’s healthcare reform
proposal following the summit. House Republican leader John Boehner (R-OH) criticized

the plan outlined in the President's budget, saying "[t]axpayers cannot afford to subsidize
a bureaucratic takeover of health care with a massive tax hike on all Americans . . . ."

Some issues that were discussed in the breakout sessions included the need to simplify
the system to reduce costs and medical errors and the need to make investments up
front, such as in health information technology and comparative effectiveness.

Other issues were more controversial. For example, the need to create a public plan
option seems to be one of the major sticking point in the debate to overhaul the
healthcare system. While Democrats maintain a public plan option is needed to reduce
costs to consumers and save money within the system, Republicans argue a public plan
would be an unfair competitor and would ultimate mean the demise of private health

The Department of Health and Human Services (HHS) released a report at the forum,
Americans Speak on Health Reform: Report on Health Care Community Discussions,
which summarizes comments from thousands of Americans who participated in Health
Care Community Discussions across the country.

The cost of health insurance was the top issue of concern for the participants in the
community discussions, according to the report, with 31% citing this as their biggest

Cost of healthcare services came in a close second with 24% of the community discussion
participants ranking this as their top concern.

Lack of emphasis on prevention, pre-existing conditions limiting insurance access, and
quality of care also were listed as key concerns, HHS reported.

In terms of reforming the system, participants “called for a system that is fair, patient-
centered and choice-oriented, simple and efficient, and comprehensive,” HHS said.

The report also includes a series of testimonials from people who have struggled with the
current healthcare system.

Grassley Says Comprehensive Healthcare Reform Needs To Be
Done This Year
If comprehensive healthcare reform is not put in place this year, it probably will not be
accomplished for four more years because of the election cycle, Senate Finance
Committee Ranking Member Charles Grassley (R-IA) warned at a March 19, 2009 briefing
with reporters.

During the briefing, sponsored by the Kaiser Family Foundation, Families USA, and the
National Federation of Independent Business, Grassley fielded questions on a number of
contentious issues, most notably about whether comprehensive healthcare reform should
include a public plan option.

Grassley acknowledged both Republicans and Democrats likely view the exclusion or
inclusion of a public plan option in healthcare reform legislation as a deal breaker, adding
that at this point he does not see a workable compromise on the horizon.

At the same time, Grassley said he was open to leaving all options on the table for
further discussion, noting similar “deal breaker” issues arose with legislation to add a

prescription drug benefit to Medicare, albeit on a much smaller scale than the challenges
involved in comprehensive healthcare reform.

Grassley said Republicans are concerned that a public plan option could lead to
substantial crowd-out of private insurance coverage that would eventually end up in a
single-payor system. Grassley cited estimates that 118 million Americans would move to
public coverage with a public plan option.

This result, Grassley continued, runs contrary to President Obama’s campaign promises
that Americans would be able to keep their existing insurance coverage.

Democrats have argued, however, that a public health insurance plan would heighten
competitive pressures and help contain costs.

The major stumbling block to comprehensive healthcare reform, Grassley noted, is the
extent to which we have market-based health insurance or government-based health

Grassley said a potential compromise may take the form of legislating minimum baselines
for health insurance that preempt state law or allowing insurers to sell policies across
state lines.

Another “800 pound gorilla” is how to fund healthcare reform, Grassley said in response
to a question about proposals to limit healthcare deductions and tax healthcare benefits.

Grassley said certain economic analyses have shown that higher priced health plans can
result in overutilization and are a contributing factor to inflation of healthcare costs.

But Grassley said any provision for capping itemized deductions would need “great, big
consensus to get it done.”

Grassley also acknowledged there may need to be some upfront investments in
healthcare reform, but said the GOP consensus is that pay-as-you-go rules should be

As far as the timetable, Grassley told reporters he expects to see a bill on the Senate
floor by June and added he had no reason to doubt this would be accomplished through
regular order not the reconciliation process, which would mean Democrats would need
only a simple majority, or 51 votes, rather than the 60 votes required to invoke cloture
and end a Republican filibuster.

“If we don’t set an aggressive timetable, it is not going to get done this year,” Grassley

HHS Report Reflects Urgency For Healthcare Reform
Healthcare costs are rising at an alarming rate, while access to quality care continues to
decline, according to a report posted on the Department of Health and Human Services’ website.

The report, The Costs of Inaction, makes the case for prioritizing healthcare reform.

The report noted that employer-sponsored health insurance premiums have more than
doubled in the last nine years, as have overall healthcare costs.

The proportion of spending attributable to Medicare and Medicaid is expected to rise from
4% of Gross Domestic Product (GDP) in 2007 to 19% of GDP in 2082, making it the
principal driving force behind rising federal spending in the decades to come, HHS said.

In addition, half of all personal bankruptcies are at least partly the result of medical
expenses, the report said.

At the same time, the report found declining access to care, with an estimated 87 million
people uninsured at some point in 2007 and 2008. More than 80% of the uninsured are
in working families, the report noted.

According to HHS, because of the current economic crisis, “even people with insurance
are forgoing needed medical care, including prescription medications and doctor visits,
because of inability to pay copayments and deductibles.”

In addition, our health system has not achieved the quality that one might expect. The
report found that across 37 performance indicators, the United States achieved an overall
score of 65 out of a possible 100.

DeParle Strikes Optimistic Outlook For Healthcare Reform This
Year, Cites Policy Options For Overcoming Objections To Public
White House Office of Health Reform Director Nancy Ann DeParle during an April 15,
2009 briefing with reporters cited uniform agreement about the need to change the
status quo and a willingness among lawmakers to work constructively toward that
end as positive signs that healthcare reform legislation will be enacted this year.

During the briefing, part of a series on healthcare reform sponsored by the Kaiser Family
Foundation, Families USA, and the National Federation of Independent Business, DeParle
said she has spent a significant amount of her time since taking office a month ago
speaking with lawmakers about healthcare reform.

Unlike the effort 15 years ago under the Clinton Administration, DeParle said this time
around there has been significant engagement from relevant committee chairs to make
healthcare reform a priority.

DeParle said committee staffers already are working on drafting specifications and even
in some cases bill language, and that the White House is providing “active technical
assistance” to those efforts.

DeParle responded to questions from reporters on a number of healthcare reform issues,
but none took center stage more than the controversial question of a public plan option.

While Democrats view a public plan option as key to lowering costs and expanding
consumer choice, Republicans have argued a public plan will lead to crowd out and
eventually the demise of private health plans.

But DeParle emphasized that policy options exist to address many of the concerns raised
about a public plan, although she conceded that underlying philosophical objections
would make bridging the divide much more challenging.

Asked to define a public plan, DeParle explained that it would be sponsored by the
government, would have low or non-existent administrative costs, and would not require
brokers for selling.

DeParle said it could be operated under the same rules that apply to other plans, could
have similar payment rates, or could have payment rates that are tied to Medicare.

DeParle also noted as one potential model state employee health plans that are
sponsored by the government but operated by private plans.

DeParle said the President included a public plan option as part of his healthcare reform
proposal as a mechanism to lower costs and keep private plans “honest” by increasing
choice and competition.

Responding to a question about whether President Obama would sign healthcare reform
legislation that did not include a public plan option, DeParle noted that the President was
focused on achieving lower costs and increased competition, but remained open to
considering other avenues that are suggested to reach those goals.

DeParle also fielded questions about how to finance healthcare reform, including
proposals to eliminate current tax exclusions.

According to DeParle, this approach prompts “serious concerns” within the
administration about undermining the current system of employer-based coverage, which
Obama pledged during his campaign should remain intact. DeParle added, however, that
the White House is open to working with Congress on the financing issue.

DeParle also faced questions about whether the administration supported using the
budget reconciliation process to pass healthcare reform legislation.

DeParle said the administration wanted to see a bipartisan bill and that reconciliation
would not be its “preferred method” of moving forward. At the same time, DeParle
reiterated the administration’s commitment to enacting healthcare reform this year.

Congress Passes FY 2010 Budget Resolution
Both the House and the Senate approved along party-lines the conference report on
President Obama’s fiscal year 2010 budget plan. The Senate approved the measure by a
vote of 53 to 43 and the House by a vote of 233 to 193, with all Republicans in the House
voting no.

The approved report contains reconciliation instructions aimed at moving health reform
through Congress faster by preventing a Senate filibuster.

According to House Budget Committee Chairman John Spratt, if legislation for healthcare
reform cannot be achieved through regular procedures, “the budget’s reconciliation
instructions requiring committees to report legislation by October 15 provide a fall-back
to ensure that these initiatives can move through Congress.”

Senator Mike Enzi (R-WY) said the $3.6 trillion budget spends too much and the inclusion
of the budget reconciliation provision can be used to bypass “a full and fair legislative
process” on upcoming healthcare and higher education bills.

“Reconciliation is intended for meaningful deficit reduction or budgetary issues, not for a
bill with as many moving parts that affect as many people as education and health care

reform. Reconciliation is a slippery slope that ties the hands of the minority party,” said
Enzi. “Health care reform is too big of an issue to advance with procedural shortcuts."

The conference agreement also retains, as requested by President Obama, a deficit-
neutral reserve fund to allow for major health reform.

Healthcare Spending
Obama Signs Stimulus Bill With Funding For HIT, Medicaid
President Obama signed into law February 17, 2009 a massive $787 billion economic
recovery package that included a number of significant healthcare-related provisions.

The package included subsidies for COBRA premiums, new investments in health
information technology (HIT), and a temporary across-the-board increase in the federal
medical assistance percentage (FMAP) to help state Medicaid programs weather the
economic downturn.

The House passed the American Recovery and Reinvestment Act of 2009 (H.R. 1) on
February 13, 2009 by a 246-183 margin, the Senate followed suit on the same day in a
60-38 vote.

“Because we know that spiraling health care costs are crushing families and businesses
alike, we're taking the most meaningful steps in years towards modernizing our health
care system,” said Obama in remarks at the bill signing.

“It's an investment that will take the long overdue step of computerizing America's
medical records to reduce the duplication and waste that costs billions of health care
dollars, and medical errors that cost thousands of lives each year,” Obama added.

The bill includes $17.2 billion in payment incentives to Medicare and Medicaid providers
who adopt electronic health records and $2 billion for affiliated grants and loans through
discretionary funding.

But Republican lawmakers blasted the bill, including the healthcare-related provisions.

“Unfortunately, Democrats shut out Republican ideas to produce a trillion dollar spending
package that could restrict patient access to life-saving therapies, drive up health
insurance premiums for employees and small businesses, and waste billions of hard-
earned taxpayer dollars,” said Senate Health, Education, Labor and Pensions Committee
Ranking Member Mike Enzi (R-WI).

COBRA, Medicaid

The bill includes a 65% tax credit to help workers who lose their jobs retain health
insurance through COBRA. According to a White House fact sheet, this measure will help
7 million Americans keep their healthcare coverage.

The new law also provides $87 billion to states in the form of a temporary increase in the
FMAP. The White House said the increase would help protect roughly 20 million people
whose eligibility for Medicaid might otherwise be at risk.

Comparative Effectiveness

One controversial provision allots $1.1 billion for comparative effectiveness research,
which is intended to arm providers and patients with better information for evaluating the
relative merits of different treatment options.

In a statement, medical device group AdvaMed said it supports comparative effectiveness
research and “appreciates that changes were made to the report language to express the
intent of Congress—specifically that the funds under the program are to be used to study
the medical effectiveness of different approaches to treating illness.”

But Enzi called the comparative effectiveness provision “a Trojan horse for the federal
government to develop ways to ration health care.”


The bill also includes significant new expansions of privacy and security requirements
under the Health Insurance Portability and Accountability Act.

Privacy advocates argued the provisions were necessary to ensure consumer confidence
in a nationwide health information exchange. But other stakeholders said the provisions
did not strike the right balance between privacy concerns and overly burdensome

Health Information Technology

ONC Issues Health IT Strategic Plan
The Department of Health and Human Services Office of the National Coordinator (ONC)
issued June 3, 2008 its five-year strategic plan for achieving a national, interoperable
health information technology (IT) infrastructure that supports the two goals of patient-
focused healthcare and population health.

The ONC-coordinated Federal Heath IT Strategic Plan (Plan) covers the timeframe of
2008-2012 and details four objectives related to privacy and security, interoperability, IT
adoption, and collaborative governance as applied to the two, overarching goals.

While these themes recur across the goals, they apply in very different ways, the Plan

The Plan describes 43 strategies for achieving each objective, with measurable
milestones to assess progress and a set of illustrative implementation actions.

Overall, the strategies detailed in the Plan seek to engage multiple stakeholders across
the public and private sector; emphasize privacy and security protections, and focus on
the healthcare consumer as a critical participant.

“Consistent with ONC’s mission and role, the Plan is not limited to the activities and tasks
that ONC directly sponsors. This Plan is primarily federally focused with many of the
strategies proposed in the Plan designed to harmonize activities in the public and private
sectors,” according to the Executive Summary.

Few Physicians Have Adopted EHR, Study Finds
Only 4% of 2,758 physicians responding to a recent survey reported having an extensive,
fully functional electronic health records (EHR) system, and 13% reported having a basic
system, according to a study published June 18, 2008 in the New England Journal of

Among the 83% of respondents who did not have EHR, 16% reported that their practice
had purchased but not yet implemented such a system at the time of the survey.

The study, Electronic Health Records in Ambulatory Care—A National Survey of
Physicians, was supported by the Department of Health and Human Services Office of the
National Coordinator for Health Information Technology.

According to the survey, physicians who were younger, worked in large or primary care
practices, worked in hospitals or medical centers, and lived in the western region of the
United States were more likely to use EHR.

Of the 4% of physicians with fully functional EHR systems, most physicians reported the
system had a positive effect on the quality of clinical decisions (82%), communication
with other providers (92%) and patients (72%), prescription refills (95%), timely access
to medical records (97%), and avoidance of medication errors (86%).

In addition, the survey found most physicians with fully functional systems reported
averting a known drug allergic reaction (80%) or a potentially dangerous drug interaction
(71%), being alerted to a critical laboratory value (90%), ordering a critical laboratory
test (68%), and providing preventive care (69%). Physicians with basic systems reported
having the same effects but less commonly than those with fully functional systems, the
article said.

The survey also found that 93% of physicians with fully functional systems and 88% with
basic systems reported being satisfied with their EHR systems.

Of the survey respondents that did not adopt EHR, the most commonly cited barriers to
adoption were capital costs (66%), not finding a system that met their needs (54%),
uncertainty about their return on the investment (50%), and concern that a system
would become obsolete (44%).

According to the study, its findings "suggests that the U.S. health care system faces
major challenges in taking full advantage of electronic health records to realize its health
care goals."

In addition, improving the usability of electronic health records may be critical to the
continued successful diffusion of the technology, the study said.

The study warned that "the cost of achieving widespread adoption of electronic health
records in the United States could be high, probably in the tens or hundreds of billions of

HHS Moves To Implement New Incentives For E-Prescribing
The Department of Health and Human Services Secretary Michael Leavitt outlined July
21, 2008 the agency’s plan for implementing new incentive payments Medicare will make
to physicians who adopt and use e-prescribing.

Under the Medicare Improvements for Patients and Providers Act of 2008, successful
electronic prescribers will be eligible for a 2% bonus payment in 2009 and 2010, a 1%
incentive payment in 2011 and 2012, and a one-half percent bonus in 2013.

Beginning in 2012, physicians who fail to adopt e-prescribing will see a reduction in
payments, Leavitt said.

Leavitt predicted in a call with reporters that the incentive payments would have a
“profound effect” on the adoption and use of e-prescribing.

Centers for Medicare and Medicaid Services (CMS) Acting Administrator Kerry Weems
said widespread use of e-prescribing could save Medicare up to $156 million over five
years in avoided adverse drug events.

The e-prescribing incentive payments will be part of the Physician Quality Reporting
Initiative, which provides eligible healthcare professionals with bonus payments of up to
2% in 2009 and 2010 for reporting on certain quality measures.

Weems said further details of the e-prescribing incentive payments would be set forth in
the 2009 Medicare Physician Fee Schedule final rule.

James King, President of the American Academy of Family Physicians, said the incentive
payments would help lessen one of the barriers to widespread adoption of e-prescribing—
implementation costs.

King added, however, that state laws preventing e-prescribing across state lines also
pose an obstacle.

Hospitals Cautious About Subsidizing EMR Adoption Despite
Relaxed Federal Rules
Hospitals have been slow to help physicians purchase electronic medical records (EMRs),
despite regulatory exceptions allowing them to do so without running afoul of federal
fraud and abuse laws, according to a study issued September 18, 2008 by the Center for
Studying Health System Change (HSC).

“While some hospitals are committed to taking advantage of the regulatory changes by
offering direct financial subsidies to promote physician adoption of EMRs, the other
common strategies, such as offering IT support and extending vendor discounts to
physicians, if properly structured, could have been pursued without regulatory changes,”
noted the HSC issue brief detailing the study's findings.

The Department of Health and Human Services issued in August 2006 exceptions to the
federal physician self-referral and anti-kickback laws that opened the door for hospitals to
subsidize up to 85% of the upfront and ongoing costs of EMR software and related
information technology support services for physicians.

The regulatory exceptions/safe harbors are set to sunset on December 31, 2013.

The study, funded by the Robert Wood Johnson Foundation, was based on site visits to
12 nationally representative metropolitan communities in 2007.

According to the study, “a few hospitals have begun small-scale, phased rollouts of EMRs,
but the burden of other hospital information technology projects, budget limitations and
lack of physician interest are among the factors impeding hospital action.”

Of 24 hospitals interviewed by HSC, seven reported pursuing a strategy to provide
financial or other support to physicians to purchase EMRs, with four of those at the
implementation stage.

The remaining 17 hospitals were at different stages of planning and evaluation, but none
expected to implement a program before the start of 2009, the study said.

Many of the hospitals expected to provide some form of IT support to physicians, but only
11 of the 24 hospitals were considering subsidizing a portion of EMR costs as allowed
under the regulatory changes, the study noted.

“While hospitals have strategic incentives to provide support, particularly to tie referring
physicians to their institution, the effects of the regulatory changes on physician EMR
adoption will ultimately depend both on hospitals’ willingness to provide support and
physicians’ acceptance of hospital assistance,” said HSC senior researcher and co-author
of the study Joy M. Grossman, Ph.D.

Report Finds Substantial Uptick In State Legislation On Health IT
States have dramatically increased the pace of enacting legislation to spur the adoption
of health information technology (HIT) by the healthcare sector, according to a new
report released December 10, 2008 by the National Conference of State Legislatures

The report found lawmakers in state legislatures around the country introduced more
than 370 bills related to HIT during an 18-month period between 2007 and 2008. During
that timeframe, 44 states and the District of Columbia enacted 132 bills containing HIT
provisions, three times as many bills that passed in the same period from 2005 to 2006.

Meanwhile, six states enacted comprehensive measures to safeguard patient privacy
while facilitating exchange of health data, the report said.

Driving this flurry of legislative activity is the states’ view that HIT plays an integral part
in healthcare reform and cost containment efforts, NCSL said.

“This is a healthcare IT revolution in that state governments and their federal partners
are moving toward a seamless, integrated system of information sharing ranging from
patient medical records to insurance claims to filling a patient’s drug prescription,” said
Massachusetts state senator Richard Moore, NCSL Vice President.

HHS Issues Final ICD-10 Rule
The Department of Health and Human Services (HHS) published in the January 16, 2009
Federal Register (74 Fed. Reg. 3328) a final rule that would replace the ICD-9-CM code
sets as Health Insurance Portability and Accountability Act of 1996 (HIPAA) standards for
reporting healthcare diagnoses and procedures with greatly expanded ICD-10 code sets.

HHS also finalized a separate rule (74 Fed. Reg. 3295) adopting the updated X12
standard, Version 5010, and Version D.0 for certain electronic healthcare transactions.

For the ICD-10 code sets, the final rule sets the compliance date at October 1, 2013,
providing nearly five years from the date of publication for industry implementation. The
original implementation date in the proposed rule was two years earlier, "but a large
majority of public comments stated that more time would be needed for effective
industry implementation," the agency said in a fact sheet on the new rule.

Under the transaction standards final rule, covered entities must comply with Version
5010 (for some healthcare transactions) and Version D.0 (pharmacy transactions) on
January 1, 2012.

"The new version of the standard for electronic health care transactions (Version 5010 of
the X12 standard) is essential to the use of ICD-10 codes because the current X12
standard (Version 4010/4010A1), cannot accommodate the use of the greatly expanded
ICD-10 code sets," the fact sheet said.

According to HHS, adoption of the new standards will:

      Support Medicare's value-based purchasing initiative and antifraud and abuse
       activities by accurately defining services and providing specific diagnosis and
       treatment information;
      Provide the precision needed for a number of emerging uses such as pay-for-
       performance and biosurveillance. Biosurveillance is the automated monitoring of
       information sources that may help in detecting an emerging epidemic, whether
       naturally occurring or as the result of bioterrorism;
      Support comprehensive reporting of quality data;
      Ensure more accurate payments for new procedures, fewer rejected claims,
       improved disease management, and harmonization of disease monitoring and
       reporting worldwide; and
      Allow the United States to compare its data with international data to track the
       incidence and spread of disease and treatment outcomes because the United
       States is one of the few developed countries not using ICD-10.

Stimulus Bill Incentives For Eligible Professionals And Hospitals
Using EHR
The following is an excerpt of an article published in Health Lawyers Weekly by Jeffrey W.
Short, Hall, Render, Killian, Heath & Lyman, PC.

The American Recovery and Reinvestment Act of 2009 (the Act) includes among its
provisions incentives for the adoption and use of electronic health records (EHR)
technology by Medicare and Medicaid professionals and hospitals. Medicare offers
incentive payments for a period of up to five years. Medicare will begin penalizing
professionals and hospitals by reducing payments to professionals and hospitals who fail
to adopt EHR technology by 2015. Medicaid professionals and hospitals are also eligible
for incentive payments under the Act, with first-year payments available until 2016, and
subsequent payments available no later than 2021.

Medicare Incentives—Eligible Physicians

Under the Act, eligible professionals may apply to receive Medicare incentive payments
between the years 2011 and 2016. In addition, the Act calls for a reduction in payments

to eligible professionals if they do not adopt certified EHR technology by 2015. EHR
technology includes an electronic record of health-related information on an individual
that includes patient demographic and clinical health information and has the capacity to
provide clinical decision support, support physician order entry, capture and query
information relevant to healthcare quality, and exchange electronic health information
with, and integrate such information from, other sources. EHR technology is "certified"
when it meets standards and implementation specifications for health information
technology as adopted by the Secretary of the Department of Health and Human Services

Eligible professionals may apply to the Secretary beginning in 2011, but no later than
2014, to receive incentive payments. An eligible professional includes (1) a doctor of
medicine or osteopathy, (2) a doctor of dental surgery or of dental medicine, (3) a doctor
of podiatric medicine, (4) a doctor of optometry, and (5) a chiropractor.

Eligible professionals who (1) are employed by a qualified Medicare Advantage (MA)
organization (which is an MA organization organized as a health maintenance
organization), or (2) are employed by or are partners of an entity that furnishes at least
80% of the entity's patient care services to enrollees of the MA organization through a
contract with the MA organization, and (3) furnish at least 75% of professional services
to enrollees of the MA organization and furnish on average at least 20 hours per week of
patient care services, may also receive incentive payments under the Act.

In general, hospital-based eligible professionals (such as a pathologist, anesthesiologist,
or emergency physician, who furnishes substantially all covered professional services
during the reporting period for a payment year in a hospital setting, whether inpatient or
outpatient, through the use of the facilities and equipment, including qualified electronic
health records, at the hospital) will not be eligible for incentive payments through this
Section of the Act.

Incentive payments will be given to eligible professionals for the meaningful use of
certified EHR technology until year 2016. An eligible professional is considered a
meaningful EHR user if he or she (1) demonstrates use of certified EHR technology in a
meaningful way, including use of electronic prescribing, (2) demonstrates that the use of
certified EHR technology is connected in a manner that provides for the electronic
exchange of health information to improve the quality of healthcare, such as promoting
care coordination, and (3) submits information on clinical quality measures and such
other measures as selected by the Secretary.

If an eligible professional has not become a meaningful user of certified EHR technology
by 2015, that eligible professional's fee schedule amount for covered professional
services during that and subsequent payment years will be equal to an applicable percent
of the fee schedule amount that would otherwise apply to those covered professional

There is an exception for those who would experience significant hardship by being
required to adopt the certified EHR technology. The Secretary may, on a case-by-case
basis, determine if eligible professionals are exempt from the payment reductions for
failure to adopt certified EHR technology, subject to an annual review, if the requirement
for being a meaningful EHR user would result in significant hardship. Such an example
would be an eligible professional who practices in a rural area without sufficient internet
access. However, in no case may an eligible professional be granted such exemption for
more than five years.

Medicare Incentives—Eligible Hospitals

Eligible hospitals will receive incentive payments for being EHR users starting in 2011
until 2015. Section 4102 also provides for the reduction in Medicare and Medicaid
payments in the event the eligible hospital does not implement and use EHR after 2015.

A hospital is eligible for incentive payments if it is either a subsection (d) hospital or a
critical access hospital and uses EHR technology. A Subsection (d) hospital does not
include: (1) rehabilitation hospitals, (2) hospitals where the patients are predominantly
under age 18, (3) hospitals having average inpatient stays of greater than 25 days, or
(4) hospitals involved extensively in the treatment of or research on cancer.

If a hospital qualifies as an eligible hospital as set forth above, the hospital can receive
incentive payments if it uses EHR technology. A hospital is considered to be using EHR
technology if it: (1) actually uses the EHR technology during the 12 month period
specified by the Secretary, (2) the EHR technology is connected in a manner to provide
for the electronic exchange of health information to improve the quality of healthcare,
such as promoting care coordination, and (3) the hospital uses the EHR to submit
information on clinical quality measures and other measures selected by the Secretary
and published in the Federal Register subject to public comment.

The hospital will need to demonstrate its use of EHR through means specified by the
Secretary including (1) attestation, (2) submission of claims with appropriate coding, (3)
survey response, (4) submission of information on clinical quality measures and other
measures selected by the Secretary, and (5) other means specified by the Secretary.

If a hospital does not become a meaningful user of a certified EHR technology on or after
2015, the hospital may be subject to reductions in its annual market basket adjustment.
This reduction is phased in over three years beginning in 2015 with a 25% reduction in
2015, a 50% reduction in 2016, and a 75% reduction in 2017. For Critical Access
Hospitals that do not become meaningful users of certified EHR technology on or after
2015, the percentage of cost for which they will be reimbursed will be reduced from
101% to 100.66% in 2105, 100.33% in 2016, and 100% in 2017.

Medicaid Incentives—Eligible Professionals and Hospitals

Eligible professionals may receive Medicaid incentive payments up to 85% of the net
allowable cost for certified EHR technology. For these Medicaid incentive payments, the
term "eligible professional" includes physicians, dentists, certified nurse midwives, nurse
practitioners, and physician assistants (PAs) in PA-led rural health clinics (RHCs) or
federally qualified health centers (FQHCs). These professionals must waive their right to
payment under sections of the Act related to Medicare professional incentives and MA

This group of eligible professionals is further subdivided, and includes: (1) an eligible
professional who is not hospital-based and who has at least 30% of the professional's
volume attributable to Medicaid patients; (2) a pediatrician who is not hospital-based who
has at least 20% of the professional's volume attributable to Medicaid patients; and (3)
FQHCs and RHCs that have at least 30% of their volume attributable to needy individuals.

The second group eligible for Medicaid incentive payments comprises children's hospitals
and acute care hospitals (not included in the first group) that have at least 10% of their
volume attributable to Medicaid patients.

See additional discussion about new privacy and security requirements under ARRA
related to health information technology under the Privacy and Security heading.

Few Hospitals Have Comprehensive EHR Systems, Study Finds
Only 1.5% of U.S. hospitals have an electronic health records (EHRs) system present in
all clinical units, according to a recent study published online in the New England Journal
of Medicine.

The study found an additional 7.6% of acute care hospitals have a basic system in place
that included functionalities for physicians’ notes and nursing assessments in at least one
clinical unit. This percentage went up to 10.9% without the requirement for clinical

For the study, Use of Electronic Health Records in U.S. Hospitals, researchers surveyed all
acute care hospitals that are members of the American Hospital Association for the
presence of 32 specific electronic-record functionalities in all major clinical units.

The survey had a 63.1% response rate, or 3049 hospitals. Researchers then excluded
federal hospitals for a total of 2952 institutions.

According to the study, researchers found large variations in the implementation of key
clinical functionalities across U.S. hospitals.

For example, 12% of hospitals had electronic physicians’ notes across all clinical units
and 17% had computerized provider-order entry for medications.

More than 75% of hospitals, however, reported adopting electronic laboratory and
radiologic reporting systems.

As expected, researchers found larger hospitals, major teaching hospitals, and hospitals
in urban areas were more likely to report having an electronic-records system.

But somewhat surprisingly, the researchers also found no correlation between the rate of
EHR adoption and whether a hospital was a public or private institution.

Researchers noted, however, that they did not examine detailed indicators of the
hospitals' financial health.

The vast majority of surveyed hospitals (74%) cited lack of adequate capital as the most
common barrier to adopting an EHR. Forty-four percent cited maintenance costs; 36%
cited physician resistance, 32% cited unclear return on investment, and 30% cited not
having staff with adequate expertise in information technology.

Researchers concluded the low levels of adoption of EHRs mean policymakers face a
daunting task in achieving healthcare performance goals that depend on health
information technology.

“A policy strategy focused on financial support, interoperability, and training of technical
support staff may be necessary to spur adoption of electronic records systems in U.S.
hospitals,” the report said.

Report Finds Significant Uptick In E-Prescribing
Significant progress in the adoption and use of electronic prescribing has been
accomplished over the last two years, according to a new report issued by Surescripts,
which operates the country’s largest e-prescribing network.

“In the past two years, the U.S. has gone from 19,000 to 103,000 prescribers routing
prescriptions electronically—punctuated by 39 percent sequential growth in prescriber
adoption in the first quarter of this year,” said Harry Totonis, president and CEO of

According to the National Progress Report on E-Prescribing, total e-prescribing message
volume doubled between 2007 and 2008 to over 240 million, while electronic requests for
prescription benefit information grew from 37 million to 78 million during that time

The report also found prescription histories delivered to prescribers grew from over 6
million in 2007 to over 16 million in 2008. Prescriptions routed electronically grew from
29 million in 2007 to 68 million in 2008.

Surescripts, which was founded by pharmacies and pharmacy benefit managers, said
only about 30% of electronic medical record (EMR) software was deployed for all three e-
prescribing services—prescription benefit, prescription history, and prescription routing—
by the end of 2008, compared to about 80% of standalone e-prescribing software.

To participate in the Surescripts network, the prescriber, pharmacy, and payor must use
software that has completed the Surescripts certification process. Surescripts said it has
certified more than 200 software applications to date.

The report noted the number of prescribers routing prescriptions electronically grew to
12% of all office-based prescribers by the end of 2008. Also by the end of last year,
Surescripts could provide access to prescription benefit and history information for 65%
of U.S. patients, the report said.

“Action is required, however, to ensure continued progress toward mainstream adoption
and use of e-prescribing as a more informed, paperless prescribing process that reduces
healthcare costs and improves safety and efficiency for all,” the report concluded.

Healthcare Access

Congress Enacts Mental Health Parity Legislation
The House and Senate passed mental health parity legislation as part of the massive
economic stabilization bill aimed at shoring up the nation’s troubled financial system.

The Senate approved the bill (H.R. 1424) by a 74-25 margin on October 1, 2008. The
House followed suit October 3, 2008 in a 263-171 vote. President Bush signed the bill
into law on October 3, 2008.

The mental health parity legislation requires insurance companies and employers offering
mental health coverage to provide it on par with the coverage offered for other physical

“Millions of Americans will now be assured greater access to mental and behavioral health
coverage while continuing to benefit from the innovative programs health plans have
developed to promote high-quality, evidence-based care,” said Karen Ignagni, President
and Chief Executive Officer of America’s Health Insurance Plans.

The American Medical Association also praised the legislation’s passage, saying it ends
“more than ten years of gridlock on the issue of mental health parity.”

“Thanks to congressional action, we can bring an end to insurance discrimination against
patients with mental health needs,” the group said in a statement.

Hospitals and Health Systems

Florida Appeals Court Says Acute Care Hospitals Could Become
Caregivers To Vulnerable Adults Under State Statute
The Florida District Court of Appeal held June 10, 2008 that in certain circumstances
acute care hospitals could be considered caregivers to vulnerable adults subject to
liability under the “Adult Protective Services Act,” chapter 415, Fla. Stat. In the specific
case, however, the appeals court rejected such a claim because there were no allegations
that the hospital "abused" or "neglected" the comatose patient.

The representatives of Scott Allan Gould’s estate (plaintiffs) sued Shands Teaching
Hospital and Clinics (Shands), alleging Gould had been improperly intubated following a
transplant surgery. As a result of the improper intubation, Gould entered into a persistent
vegetative state, and the family elected to terminate life support after 79 days.

Gould was unmarried and had no children, therefore damages available to his family
under Florida law for medical malpractice (chapter 766) and wrongful death (chapter
768) were limited to medical expenses, funeral expenses, and loss of net accumulations
of the estate.

Rather than file under either chapter 766 or 768, the family asserted a claim under the
“Adult Protective Services Act,” alleging Gould was a "vulnerable adult" victim of medical
abuse and neglect that resulted in wrongful death. Under chapter 415, the family was
entitled to damages stemming from breach of fiduciary duty, reckless infliction of
emotional distress, and unjust enrichment.

The trial court dismissed the case, finding it was properly characterized as a
medical malpractice action, not one involving a vulnerable person and a caregiver. The
court granted plaintiffs 30 days to file an amended complaint based on medical
malpractice. Plaintiffs declined to do so and appealed.

The appeals court rejected Shands' argument that an acute care hospital could never be
a caregiver under the statute. According to the appeals court, the comatose Gould was a
vulnerable adult under chapter 415 and the hospital arguably became a "caregiver" when
it undertook his care following the improper intubation.

At the same time, however, the appeals court concluded the chapter 415 claim was
properly dismissed as plaintiffs asserted no allegations that the hospital "abused" or
"neglected" Gould after he entered a persistent vegetative state.

Thus, the appeals court agreed with the trial court that the complaint clearly alleged
medical negligence, not a chapter 415 claim.

Bohannon v. Shands Teaching Hosp. and Clinics, Inc., No. 1D06-6594 (Fla. Ct. App. June
10, 2008).

Third Circuit Upholds Dismissal Of Lawsuit Against Health
System For Overcharging Uninsured
A federal district court correctly dismissed a proposed class action against a health
system and one of its hospitals alleging breach of contract and consumer fraud with
respect to its uninsured billing practices, the Third Circuit ruled June 24, 2008.

The appeals court affirmed the decision of the U.S. District Court for the District of New
Jersey, adopting that opinion (DiCarlo v. St. Mary’s Hosp., No. 05-1665 (D.N.J. July 19,
2006)) as its own.

Plaintiff Justin DiCarlo, who is uninsured, brought a proposed class action against Bon
Secours Health System Inc. (BSHS), alleging he was billed far more than insured patients
would have been charged for treatment he received at its St. Mary’s Hospital (St. Mary’s)
in 2004.

As a condition of treatment, DiCarlo was required to sign a form guaranteeing payment of
unspecified charges. St Mary’s then billed DiCarlo $3,483.04, its full chargemaster rate.

DiCarlo’s complaint alleged breach of contract, breach of the covenant of good faith and
fair dealing, unjust enrichment, violation of the New Jersey Consumer Fraud Act (N.J.
Stat. § 56:8-1, et seq.), unjust enrichment, and breach of fiduciary duty.

BSHS and St. Mary’s (collectively, defendants) moved for summary judgment, arguing
DiCarlo’s claims failed on the merits for various reasons, including the unambiguous
language in the consent form signed by DiCarlo and the fact that DiCarlo failed to allege
actual damages—an essential element of a contract claim.

The district court granted defendants’ motion and dismissed DiCarlo’s complaint with

The district court rejected DiCarlo's argument that the contract between him and St.
Mary’s contained an open price term and that the charges he was required to pay were
unreasonable on their face.

In the context of this case, “the price term was not in fact open” and the contract
unambiguously referred to St. Mary’s uniform charges set forth in its chargemaster.

While the price term “all charges” in the contract at issue was “less precise” than price
terms set forth in an “ordinary contract for goods and services, . . . [i]t is the only
practical way in which the obligations of the patient to pay can be set forth, given the fact
that nobody yet knows just what condition the patient has, and what treatments will be
necessary,” the district court explained.

In dismissing DiCarlo’s breach of contract claim, the district court said that courts “could
not possibly determine what a ‘reasonable charge’ for hospital services would be without
wading into the entire structure of providing hospital care and the means of dealing with
hospital solvency.”

The district court next dismissed plaintiff’s breach of the duty of good faith and fair
dealing claims based on its earlier finding that the contract contained a clear price term.

In rejecting DiCarlo’s claim alleging that defendants’ billing practices violated New
Jersey's Consumer Fraud Act, the district court concluded the statute did not apply to
professionals or professional services (e.g., hospital services).

The district court also found DiCarlo conferred no benefit on defendants that could give
rise to an unjust enrichment claim against them.

Finally, the district court summarily rejected DiCarlo’s argument that defendants
somehow breached a fiduciary duty owed to uninsured patients.

In adopting the district court’s opinion as its own, the Third Circuit said it was
“sympathetic to the burdens on uninsured patients who need medical care,” but that it
found the “rigorous and persuasive analysis” correctly stated the law with respect to
DiCarlo’s claims.

DiCarlo v. St. Mary’s Hosp., No. 06-3579 (3d Cir. June 24, 2008).

Joint Commission Issues Alert On Disruptive Behavior Among
Health Professionals
Rude language and hostile behavior among healthcare professionals pose a serious threat
to patient safety and the overall quality of care, the Joint Commission cautioned in a
Sentinel Event Alert issued July 9, 2008.

“Health care leaders and caregivers have known for years that intimidating and disruptive
behaviors are a serious problem,” according to a Commission press release announcing
the new Alert.

“Verbal outbursts, condescending attitudes, refusing to take part in assigned duties and
physical threats all create breakdowns in teamwork, communication and collaboration
necessary to deliver patient care,” the release said.

The Alert recommends that healthcare organizations take a number of specific steps to
address bad behavior among healthcare workers, including

      educating all healthcare team members about professional behavior;
      enforcing a code of conduct consistently and equitably;
      establishing a comprehensive approach to addressing intimidating and disruptive
       behaviors, including a “zero tolerance” policy and strong support from physician
       leadership; and
      developing a system to detect and receive reports on unprofessional behavior.

The Commission also has introduced new standards for 2009 “requiring more than
15,000 accredited healthcare organizations to create a code of conduct that defines
acceptable and unacceptable behaviors and to establish a formal process for managing
unacceptable behavior,” according to the release.

“It is important for organizations to take a stand by clearly identifying such behaviors and
refusing to tolerate them,” the Joint Commission’s President, Mark R. Chassin, M.D said.

CMS Revises Guidance On Use Of Standing Orders In Hospital
The Centers for Medicare and Medicaid Services (CMS) released October 24, 2008 in a
memorandum to state survey agency directors clarifications regarding use of standing
orders in hospitals.

According to the guidance, the “use of standing orders must be documented as an order
in the patient’s medical record and signed by the practitioner responsible for the care of
the patient, but the timing of such documentation should not be a barrier to effective
emergency response, timely and necessary care, or other patient safety advances.”

“We would expect to see that the standing order had been entered into the order entry
section of the patient's medical record as soon as possible after implementation of the
order (much like a verbal order would be entered), with authentication by the patient's
physician,” the memo said.

The memo also clarified that all qualified practitioners responsible for the care of the
patient and authorized by the hospital in accordance with state law and scope of practice
are permitted to issue patient care orders, not just a “community” physician who
admitted the patient to the hospital.

CMS also noted that it “strongly supports the use of evidence-based protocols to enhance
the quality of care provided to hospital patients.”

Thus, the agency intends “to engage with the professional community in consensus-
building efforts to advance safe practices and develop a common understanding of both
best practices and important operational definitions as they pertain to standing orders,
pre-printed order sets, and effective methods to promote evidence-based medicine.”

CMS also revised its guidance regarding the use of a preprinted order set.

Lastly, the memo explained that Medicare Conditions of Participation “do not prohibit the
use of rubber stamps in a hospital setting, when properly controlled, for authentication of
medical record entries.”

However, the memo noted, “some payers, including Medicare, may not accept such
stamps as sufficient documentation to support a claim for payment.”

Florida Supreme Court Says Hospital Law Giving Board Authority
To Override Medical Staff Bylaws Is Unconstitutional
The Florida Supreme Court struck down as unconstitutional a special law passed by the
legislature in 2003 that the court said impermissibly altered the relationship between the
board and medical staff of a private hospital located in St. Lucie County, Florida.

The St. Lucie County Hospital Governance Law (HGL) gave the Lawnwood Medical Center,
Inc. (Lawnwood) nearly unfettered authority in all matters related to medical staff
privileges, quality assurance, peer review, and contracts for hospital-based services,
according to the August 29, 2008 opinion.

“[T]he previously existing Medical Staff Bylaws established a framework for cooperative
governing in which the medical staff plays an important role in the recommendation of

candidates for appointment and credentialing, peer review, and decisions on contract-
based services,” the high court noted.

“The framework for governing and the medical staff’s important role in it pursuant to the
bylaws is altered by the HGL in a manner favorable to the Board by the many rights
conferred on the corporation, in which the HGL essentially gives the Board plenary power
to take independent action in these areas,” the high court continued.

Thus, the high court concluded the HGL amounted to a “special law” that granted a
“privilege to a private corporation” in violation of the Florida Constitution.

The American Medical Association (AMA), which submitted an amicus brief in the case,
hailed the ruling. AMA Board member Cecil B. Wilson, M.D. said the high court’s decision
“reaffirms that medical staff bylaws are a binding contract and lays out precisely why
these documents are an important part of preserving patient safety.”

“Hospital boards must work cooperatively with medical staffs to ensure that hospital
policies related to financial management do not conflict with the best interests of
patients,” he added.

Lawnwood is a for-profit corporation that owns and operates two private hospitals in St.
Lucie County, Florida. A dispute arose between Lawnwood and the medical staff regarding
the board’s concern about two physicians. The board tried to suspend their privileges
unilaterally, which the medical staff opposed.

After several court actions, Lawnwood sought relief from the legislature, which in 2003
enacted the HGL as a special law. Lawnwood contended the law was promulgated in
response to patient safety concerns.

Both the trial court and the appeals court found the HGL constituted an unconstitutional
special law because it granted Lawnwood an impermissible privilege and an impermissible
impairment of contract—i.e. the medical staff bylaws.

The high court affirmed, concluding a “grant of privilege to a private corporation” includes
more than “economic favoritism over entities similarly situated,” as Lawnwood
argued. According to the high court, a “privilege” in this context refers to any special
benefit, advantage, or rights.

“Because the HGL grants Lawnwood almost absolute power in running the affairs of the
hospital, essentially without meaningful regard for the recommendations or actions of the
medical staff, we conclude that the HGL unquestionably grants Lawnwood ‘rights,’
‘benefits’ or ‘advantages’ that fall within the term ‘privilege’” in the Florida Constitution,
the high court held.

Lawnwood Med. Ctr., Inc. v. Seeger, No. SC07-1300 (Fla. Aug. 28, 2008).

Ohio Appeals Court Says Hospitals May Withdraw From Health
An Ohio appeals court upheld September 30, 2008 a trial court decision that The Christ
Hospital (TCH) could withdraw from an integrated healthcare system it joined in 1995
with other Cincinnati-area hospitals based on its board's “good faith” determination that
the alliance compromised TCH’s charitable mission.

The appeals court also agreed with the trial court that the Health Alliance of Greater
Cincinnati (Alliance) breached its fiduciary duty to TCH and that this served as an
additional ground for the hospital’s withdrawal.

Because TCH properly withdrew from the Alliance based on an uncured event of default,
St. Luke Hospitals, Inc. (SLH) also was within its rights under the joint operating
agreement (JOA) that established the system to terminate its participation in the Alliance,
the appeals court found.

The JOA reserved certain powers to the participating hospitals so they could “continue to
exercise ultimate responsibility for fulfilling their respective charitable missions and

The JOA also required the Alliance to “at all times operate the Alliance consistent with the
charitable missions of the [Alliance] and the [participating hospitals].”

In 2005, the Alliance attempted to convince the participating hospitals to give up many of
their reserved powers. TCH and SLH both refused to approve such changes to the JOA.

After that time, the TCH board became concerned with the hospital’s future in the
Alliance based on remarks from the Alliance’s CEO regarding moving TCH from its Mt.
Auburn location to the suburbs.

TCH’s board hired a consultant to study the hospital’s future viability and options that
would allow TCH to continue to carry out its charitable mission.

Based on the report, TCH submitted a notice of withdrawal on January 12, 2006, citing
purported uncured events of default. Without waiting for the conclusion of a mandatory
60-day cooling off period, the Alliance filed a declaratory judgment against TCH.

TCH then sent a notice to the Alliance on March 8, 2006 citing additional events of
default, including the allegation that the Alliance was preventing TCH from fulfilling its
charitable mission.

In addition, TCH asked the court to find it had properly withdrawn from the Alliance and
sought a temporary restraining order to prevent the Alliance from binding TCH to $220
million in debt to finance a hospital the Alliance was building.

SLH subsequently notified the Alliance of its intent to terminate its participation based on
the uncured events of default regarding TCH and alleged breaches of fiduciary duty by
the Alliance.

The trial court granted the temporary restraining order and subsequently concluded that
TCH’s March 8, 2006 letter provided a valid basis for withdrawal.

The Ohio Court of Appeals, First District, affirmed, finding TCH and SLH properly
terminated their participation in the Alliance.

“The record shows that TCH’s board determined in good faith that the Alliance had
jeopardized TCH’s ability to fulfill its charitable mission,” a responsibility that was
specifically reserved to the hospital under the JOA, the appeals court said.

Thus, the board exercised its reserved power under the JOA to declare an event of
default, which was not cured.

The appeals court also rejected the Alliance’s contention that it owed no fiduciary duty to
its member hospitals.

“The hospitals reposed special confidence and trust in the Alliance, which resulted in a
position of superiority on the part of the Alliance, the very essence of a fiduciary
relationship,” the appeals court commented.

The appeals court found the record “replete with evidence that the Alliance breached its
fiduciary duty to TCH,” including using its superior position to improperly deny TCH
access to its revenue stream and restricting its operational control, “while embarking on a
campaign to pay bonuses to doctors who agreed to sign noncompetition agreements to
restrict TCH’s access to those doctors in the future.”

According to the appeals court, the “Alliance’s breaches of fiduciary duty were affecting
the ability of TCH to carry out its charitable mission.”

The Health Alliance of Greater Cincinnati v. The Christ Hosp., No. C-070426 (Ohio Ct.
App. Sept. 30, 2008).

Following the decision, TCH and the Alliance announced January 12, 2009 a final
agreement concerning TCH's withdrawal from the integrated healthcare system. The
settlement did not disclose any financial terms of the separation agreement.

D.C. High Court Upholds $18 Million Award To Hospital
Claiming Malpractice Insurer’s Actions Forced It To Close Down
The District of Columbia Court of Appeals upheld October 2, 2008 a jury award of over
$18 million in a lawsuit brought by a defunct hospital claiming a malpractice insurance
company tortiously interfered with the hospital’s business relationship with its attending
physicians and therefore forced it to close down.

In so holding, the D.C. high court rejected the arguments of plaintiff NCRIC, Inc.,
formerly the National Capital Reciprocal Insurance Company, that the trial court had
given the jury erroneous instructions, committed other errors during the trial, and
improperly refused to reduce the jury’s award in favor of the hospital.

The underlying litigation began in October 2000, when NCRIC, a provider of medical
malpractice insurance to D.C. physicians, sued the Columbia Hospital for Women Medical
Center, Inc. (Columbia) for breach of their insurance contract. NCRIC alleged Columbia
owed it over $1.9 million in additional premiums under that contract, which expired in

Columbia asserted counterclaims for breach of contract and tortious interference, along
with several other counterclaims that were dismissed prior to trial.

At trial, Columbia presented evidence and witness testimony supporting its allegations
that, over a long period of negotiations and disputes between NCRIC and the hospital
regarding the applicable terms and obligations of their recently expired malpractice
insurance contract, NCRIC attempted to induce attending physicians at Columbia to leave
the hospital, according to the appeals court. In addition, NCRIC allegedly encouraged
these physicians to keep their insurance policies with NCRIC once they had relocated to
other hospitals.

“Over thirty attending physicians—forty percent of the medical staff—left Columbia in the
summer and fall of 2000,” the appeals court noted. “Many of them went to other

hospitals where NCRIC provided them with equivalent insurance coverage at reduced

The appeals court also noted that, during the time when NCRIC was allegedly
encouraging physicians to leave Columbia, the hospital was already experiencing financial
struggles following its February 1998 declaration of bankruptcy and its adherence to a
February 1999 court-approved plan of reorganization.

Beginning in September 2000, the appeals court explained, all of Columbia’s financial
indicators (i.e., births, admissions, surgeries, inpatient days, referrals, etc.) dropped
dramatically, and revenues fell by approximately $10 million per year.

“Witnesses at trial attributed the plunge to the departure of so many members of the
hospital’s medical staff,” the appeals court noted.

Thus, in May 2002, “after fruitlessly exploring merger possibilities with three other non-
profit institutions, Columbia ceased operations and closed its doors,” the appeals court

After the two-week trial, the jury returned a verdict in favor of Columbia, and awarded
the hospital $220,002 on its breach of contract claim, and $18 million in damages on its
claim of tortious interference with business relations.

The trial court subsequently denied NCRIC’s motions for judgment as a matter of law,
and in the alternative, for a new trial or a remittitur of damages.

NCRIC argued on appeal that the trial court erred in failing to instruct the jury that, in
order to impose liability for tortious interference, it had to find NCRIC’s actions
“wrongful,” in addition to being intentionally disruptive of Columbia’s business

The appeals court concluded that the lower court did not err in rejecting NCRIC’s request
for such an instruction.

“Wrongful conduct is not an element of a prima facie case of tortious interference under
District of Columbia law,” the appeals court said. “Rather, the burden was on NCRIC to
establish that its intentional interference was legally justified or privileged.”

While “NCRIC might have been entitled to an affirmative defense instruction to that
effect, . . . it never requested one,” the appeals court. “The trial court was under no duty
to craft such an instruction for NCRIC sua sponte.”

The appeals court next summarily rejected NCRIC’s argument that the trial court erred by
allowing the jury to award $18 million in tort damages based on “speculative and logically
incoherent damages evidence.”

“On its face, Columbia’s evidence of its damages was sufficient to support the award,” the
appeals court said. “The jury’s award will be upheld as long as it is a ‘just and reasonable
estimate based on the relevant data,’ even if it is not proven with mathematical

The appeals court also concluded that NCRIC had failed to preserve for appeal certain of
its objections regarding the sufficiency of the evidence in support of the $18 million
damages award, and that the lower court did not err in refusing NCRIC’s motion
requesting a new trial or a remittitur.

NCRIC Inc. v. Columbia Hosp. for Women Med. Ctr., No. 05-CV-1269 (D.C. Oct. 2,

Arkansas Supreme Court Finds Hospital Entitled To Charitable
The Arkansas Supreme Court found November 6, 2008 that a hospital was entitled to
charitable immunity from a wrongful death suit filed by a deceased patient’s husband.

In so holding, the high court found the balance of factors weighed in favor of granting the
hospital charitable immunity.

Harvie Anglin and his wife Margie Anglin sued Johnson Regional Medical Center (JRMC)
and others based on allegations of medical injuries sustained by Mrs. Anglin as a result of
the JRMC’s alleged negligence.

After Mrs. Anglin died, Mr. Anglin was eventually substituted as the party of interest and
sued JRMC for wrongful death.

JRMC moved for summary judgment, contending JRMC was entitled to both governmental
and charitable immunity.

The circuit court granted JRMC’s motion for summary judgment and dismissed Anglin’s
complaint with prejudice. The circuit court concluded, among other things, that JRMC was
entitled to charitable immunity. Anglin appealed.

The high court first noted that to determine whether an organization is entitled to
charitable immunity, courts consider the following factors: (1) whether the organization’s
charter limits it to charitable or eleemosynary purposes; (2) whether the organization’s
charter contains a “not-for-profit” limitation; (3) whether the organization’s goal is to
break even; (4) whether the organization earned a profit; (5) whether any profit or
surplus must be used for charitable or eleemosynary purposes; (6) whether the
organization depends on contributions and donations for its existence; (7) whether the
organization provides its services free of charge to those unable to pay; and (8) whether
the directors and officers receive compensation.

According to the high court factors 1, 2, and 7 favored JRMC. “The first and second are
demonstrated by JRMC’s articles of incorporation, which state that the hospital provides
health services on a charitable, not-for-profit basis,” the high court explained. The
seventh factor was established by the hospital administrator’s affidavit that the hospital
provides health services free of charge to those who cannot pay.

JRMC also satisfied the fifth factor, the high court said, because the affidavit stated that
any surplus shall be used to fund the hospital to fully perpetuate its charitable community
benefit of providing medical assistance to the public.

As to the fourth factor, the high court observed, the record showed that in some years,
JRMC did earn a profit, and in others, it did not.

Disagreeing with Anglin’s argument that JRMC was not a charity hospital because in some
years it earned a profit, the high court said that factor was not dispositive and the fact
that JRMC sued patients to collect unpaid medical bills was not determinative of its
charitable status.

“Based upon a review of the totality of the relevant facts and circumstances, we hold that
the circuit court did not err in concluding that JRMC meets the requirements of a
charitable entity for purposes of asserting the defense of the charitable-immunity
doctrine,” the high court held.

One judge dissented, arguing he would reverse the grant of summary judgment because
the issue of whether JRMC is a charitable organization entitled to charitable immunity “is
contested by the parties and presents a genuine issue of material fact for the jury to

Anglin v. Johnson Reg’l Med. Ctr., No. 08-453 (Ark. Nov. 6, 2008).

Iowa High Court Finds Hospital May Be Liable For Actions Of
Independent Contractor Physicians Under Apparent Agency
The Iowa Supreme Court held December 5, 2008 that a hospital may be liable for the
actions of its independent contractor physicians under the theory of "ostensible agency."
In so holding, the high court said a reasonable jury looking at the facts of the case could
infer an agency relationship between the physicians and the hospital based on the
hospital’s actions.

Plaintiff Jerald Wilkins was seen in the emergency room at Marshalltown Medical and
Surgical Center (MMSC) September 23, 2001 by Dr. Lance Van Gundy. Because Wilkins
complained of a variety of symptoms, Van Gundy requested a chest x-ray and urged
follow up at the University of Iowa Hospitals and Clinics (UIHC).

The next day, Dr. Kraig Kirkpatrick, a radiologist, compared Wilkins' x-ray with one taken
five years ago and found a "diffuse increase in the density of a midthoracic vertebral
body." Kirkpatrick wrote in his report that a common cause of such change would be
prostate cancer. Dr. Mitchell Erickson approved the report and it was made part of
Wilkins’ file.

That same day, Wilkins came back to the ER complaining of worsening symptoms. A CT
was taken and was read by Erickson, though he made no mention of Kirkpatrick's report
in Wilkins' file at that time.

Wilkins was transferred to UIHC that same day for follow-up studies, but Kirkpatrick's
report was not included in the medical records forwarded to UIHC. Wilkins was
subsequently discharged from UIHC two days later "without any symptomatic

On February 27, 2002, Wilkins again presented to the MMSC ER and was diagnosed with
a urinary tract infection. Over the next several months, Wilkins was seen in the ER
numerous times for low back pain and received prescriptions for pain relief.

Wilkins was eventually brought back to the ER by ambulance on August 14, 2002 when
he was informed that doctors suspected prostate cancer.

On February 27, 2004, Wilkins sued MMSC and several of the emergency room physicians
alleging negligent medical care from February 27, 2002 onward. Plaintiff subsequently
amended his complaint to add McFarland Clinic, P.C. as a co-defendant.

Defendants moved for summary judgment. MMSC additionally asserted that it had no
legal responsibility for the actions of the emergency room physicians as they were
employees of McFarland and not the hospital.

The district court granted summary judgment to defendants on statute of limitation
grounds and plaintiff appealed. Wilkins' wife was subsequently substituted as plaintiff
after Wilkins' death.

Turning first to the lower court's statute of limitations findings, the high court noted that
Wilkins was not informed he had cancer until sometime after August 14, 2002, within two
years of the commencement of the action.

"Wilkins’s claim is thus not barred as a matter of law by the governing statute of
limitations," the high court held.

Addressing plaintiff's argument that MMSC was vicariously liable for any negligence
through the doctrine of "ostensible" agency (otherwise known as apparent authority), the
high court noted the actual status of the agent was immaterial.

"Thus, the mere fact that the emergency room doctors were not MMSC employees is not
dispositive," the high court held.

The high court found that, "although the record does not demonstrate that MMSC ever
expressly held out the emergency room doctors as employees, Wilkins has put forth
circumstantial evidence from which an agency relationship can be inferred."

Thus, "[u]nder the facts of this case," the high court concluded, a reasonable jury could
find that "MMSC is vicariously liable for the negligence of the emergency room doctors on
a theory of apparent authority or ostensible agency."

Wilkins v. Marshalltown Med. and Surgical Ctr., No. 06-0641 (Iowa Dec. 5, 2008).

Missouri Recognizes Negligent Credentialing Claims Against
Hospital, Appeals Court Says
Negligent credentialing is a viable claim in Missouri to assert against a hospital when a
patient was allegedly injured by a physician during a surgery performed at the hospital
where he had staff privileges, a state appeals court ruled December 9, 2008.

The Missouri Court of Appeals, Western District, reversed the lower court’s decision
granting the defendant hospital’s motion to dismiss and remanded the case for further

Plaintiff Dorothea LeBlanc filed a petition for damages against physicians Danny Carroll
and John Gillen II (collectively, the physicians), their professional corporation Bone &
Joint Specialists, P.C. (BJS), and Research Belton Hospital (Research Belton).

In her petition, LeBlanc alleged the physicians and BJS were negligent in performing
surgeries on her at Research Belton.

LeBlanc also alleged Research Belton was negligent in assuring the physicians had the
credentials to perform the surgeries at issue.

Specifically, LeBlanc claimed Research Belton negligently permitted the named physicians
to perform such extensive surgeries on her when they were not qualified by education,
training, or experience, and were not properly credentialed to perform the surgeries.

Research Belton sought to dismiss the claim, alleging negligent credentialing was not
recognized in Missouri.

Research Belton also cited immunity under Mo. Rev. Stat. § 537.035.3, which provides
that members of peer review committees and other specific individuals or entities are
immune from civil liability if their negligence in granting staff privileges is based on their
“good faith” reliance on a peer review committee’s recommendation, and when such
reliance “lacks malice and reasonably relates to the scope of inquiry of the peer review

The trial court granted the motion to dismiss without explanation.

In overturning the lower court’s decision, the appeals court first clarified that Missouri
courts have not rejected negligent credentialing as a cause of action against a hospital.

According to the appeals court, “Missouri precedent does not bar a negligence claim
against a hospital for injuries caused by independent doctors authorized to practice in
that hospital.”

With regard to Research Belton’s “immunity” argument, the appeals court clarified that
Research Belton was not asserting immunity under Mo. Rev. Stat. § 537.035.3, but
rather that the statute, which was enacted in 1973, effectively abrogated negligent
credentialing claims.

In rejecting this argument, the appeals court said the “qualifying language” in Section
537.035 suggests “the legislature . . . limited a cause of action based on actions taken in
reliance on a peer review committee,” but did not abrogate negligence claims based on
negligent credentialing.

“The trial court erred in dismissing [LeBlanc’s] . . . sufficiently pleaded claim of negligent
credentialing because it is essentially a corporate negligence action, which is viable in
Missouri,” the appeals court concluded.

LeBlanc v. Research Belton Hosp., No. WD69248 (Mo. Ct. App. Dec. 9, 2008).

U.S. Court In Texas Holds State Privilege Law Applies To Peer
Review Documents In Case Asserting State Negligence And
A federal court in Texas refused to compel production of certain hospital peer review
documents in an action asserting both state law negligence claims and violations of the
Emergency Medical Treatment and Labor Act (EMTALA).

The court found the peer review documents were only relevant to whether a physician’s
treatment met the standard of care for purposes of the state law negligence claims, not
whether it constituted an appropriate screening in accordance with EMTALA.

Plaintiff Wendy Guzman, individually and on behalf of her son, Tristan, sued Memorial
Hermann Hospital System (Memorial Hermann) asserting claims under EMTALA for failing

to provide an appropriate medical screening, failing to stabilize his condition before
discharging him, and failing to provide an appropriate transfer.

Guzman also asserted state-law negligence claims against Memorial Hermann, Philip
Haynes, M.D., Ph.D, the emergency room physician who saw Tristan, and his practice
group, Memorial Southeast Emergency Physicians, LLP.

Guzman moved to compel Memorial Hermann to produce documents relating to its post-
incident peer review of Tristan’s emergency room care. Memorial Hermann sought a
protective order asserting the peer review documents were confidential and privileged
under Texas law and the federal Health Care Quality Improvement Act (HCQIA).

Guzman did not dispute that the documents were privileged under Texas law, but argued
that federal law—i.e. HCQIA—not state law applied.

The U.S. District Court for the Southern District of Texas denied Guzman’s motion to
compel production of the peer review documents at issue.

Following an in camera review, the court determined the documents were relevant only
to the state-law claims and, based on state privilege law, were protected from
admissibility or discovery.

The issue was significant because courts have repeatedly held HCQIA does not create a
federal privilege protecting medical peer review records from discovery, the court noted.

Under Fed. R. Evid. 501, the federal common law of privilege generally applies to cases in
federal court, but the rule also provides that where state law supplies the rule of decision,
the privilege of a witness, person, or government will be determined in accordance with
state law.

Here, plaintiff asserted both federal and state claims, but the court found the documents
sought were only relevant to the state law negligence claims.

Applying the approach of the majority of jurisdictions to consider the issue, the court held
Texas privilege law applied.

In so holding, the court said the “root cause analysis” at issue in the peer review
documents was not relevant to Guzman’s federal claim under EMTALA because it is not a
medical malpractice statute.

“An EMTALA violation depends on whether Tristan was treated ‘equitably in comparison to
other patients with similar symptoms,’” not whether there was a violation in the standard
of care.

Thus, the court held Texas state law privilege applied and precluded production of the
peer review documents.

Guzman v. Memorial Hermann Hosp. Sys., No. H-07-3973 (S.D. Tex. Feb. 20, 2009).

Study Says Specialty Hospitals Not Compromising General
Hospitals’ Ability To Provide Care To Financially Needy
Although they faced some initial challenges when specialty hospitals entered their
markets, general and safety net hospitals for the most part were able to compensate
enough in other ways so as not to compromise their ability to provide care to financially

vulnerable populations, according to a new study by the Center for Studying Health
System Change (HSC).

The HSC study, funded by a Robert Wood Johnson Foundation Physician Faculty Scholars
Program grant, examined whether specialty hospital competition in three markets—
Indianapolis, Phoenix, and Little Rock, AK—made it more difficult for general hospitals to
cross-subsidize less-profitable services and provide uncompensated care.

Researchers found, while general and safety net hospitals encountered challenges related
to recruiting staff and maintaining service volumes and patient referrals, they did not
report limiting the provision of care for financially needy patients as a result of specialty
hospital competition.

Whether specialty hospitals “cream-skim” or “cherry-pick” more profitable service lines,
such as cardiac and orthopedic care, and well-insured patients from general hospitals,
thereby compromising their ability to cross-subsidize care for less profitable services, has
been a long-standing debate among policymakers.

The study, which researchers cautioned is limited to the three markets and not nationally
representative, found several ways that specialty hospital competition affected the
finances of general and safety net hospitals in those areas—namely, through competition
for physicians and other staff, new challenges in providing emergency department on-call
coverage, and decreases in volume.

Respondents to the survey reported little change in patient acuity in general hospitals
and attributed changes in payor mix to the rising rate of uninsured people in the market
generally, rather than to the loss of patient volume to specialty hospitals.

The study also noted that general hospitals were more likely than safety net hospitals to
feel the effects of competition from specialty hospitals.

According to the survey, some hospitals addressed these challenges by employing
specialists or using contractual arrangements to encourage them to concentrate their
practice at a particular hospital.

General hospitals in all three communities and a safety net hospital in Little Rock saw a
drop in service volume with specialty hospital entry, the study reported.

Safety net hospitals, on the other hand, reported little impact on service volume since
they generally do not compete intensely for patients with private insurance or Medicare.

With respect to payor mix, respondents to the study observed little impact from the
introduction of Medicare severity-adjusted diagnostic related groups under the inpatient
prospective payment system, which allows higher reimbursements for sicker patients.

“These reimbursement changes haven’t yet had the leveling effect between general
hospitals and specialty hospitals (boosting reimbursement to general hospitals and
reducing reimbursement to specialty hospitals) anticipated by policy makers, assuming
the presence of cream skimming by specialty hospitals,” the study said.

“[I]t will be important for policy makers to continue to track the impact of specialty
hospitals on the ability of general hospitals—more so than safety net hospitals—to serve
financially vulnerable patients and provide other less-profitable but needed services,” the
study concluded.

Insurance/Managed Care

Post-Claim Underwriting/Rescissions
California Legislators Clear Bill Tightening Restrictions On Post-
Claim Rescissions But Governor Vetoes
The California legislature passed August 31, 2008 legislation (AB 1945) addressing so-
called post-claim rescissions by healthcare service plans and health insurers.

Under the bill, both healthcare service plans licensed by the Department of Managed
Health Care (DMHC) and health insurers regulated by the California Department of
Insurance (Department) would have been required to complete medical underwriting
prior to issuing a contract or policy.

The bill also would have prohibited plans and insurers from canceling or rescinding an
individual plan contract or policy unless specified conditions were met.

In addition, the bill would have established in the DMHC and the Department an
independent review process for the review of plans’ and insurers’ decisions to cancel or
rescind plan contracts or policies.

The legislature passed the bill amid growing scrutiny by courts and regulators of post-
claims underwriting—i.e., rescinding health policies without proving that the applicant
willfully misrepresented themselves on their health application.

A California appeals court in December 2007 ruled that a health services plan must show
a willful misrepresentation or omission or that it made reasonable efforts to ensure a
subscriber’s application was accurate and complete as part of the precontract
underwriting process in order to lawfully rescind the contract later. (Haley v. California
Physicians’ Serv., No. G035579 (Cal. Ct. App. Dec. 24, 2007).

Finding these issues in dispute, the California Court of Appeal, Fourth Appellate District,
reversed the grant of summary judgment in favor of California Physicians’ Service, doing
business as Blue Shield of California (Blue Shield), in plaintiffs Cindy and Steve Hailey’s
lawsuit for breach of contract, breach of the covenant of good faith and fair dealing, and
intentional infliction of emotional distress.

The appeals court held that a plan has a duty under Cal. Health and Safety Code §
1389.3 to investigate the accuracy and completeness of a subscriber’s application before
it issues a contract.

A month later, however, California Governor Arnold Schwarzenegger vetoed AB 1945,
citing concerns about the “fragile” individual insurance market.

“Unfortunately, the provisions of the bill will only increase costs and further restrict
access for over 2 million Californians that currently obtain coverage in the individual
market,” according to the Governor.

The California Medical Association, which sponsored AB 1945, called the Governor’s veto
a “betrayal.”

“The Governor’s veto betrays the promise he repeatedly made to Californians to protect
them from insurance companies cancelling their health insurance when they need it

most,” said Dr. Richard Frankenstein, M.D. “Californians need health care coverage they
can count on when they get sick. This veto denies them that security.”

A bill to address so-called post-claim rescissions by healthcare service plans and health
insurers is again being floated in the California legislature.

Legislatures reintroduced a similar bill (AB 2) in December 2008.

California Regulators Continue To Line-Up Settlements With
Insurers Over Cancelled Policies
Over the last year, most of California’s major health plans reached various settlement
agreements with the Department of Managed Health Care (DMHC) or the California
Department of Insurance (CDI) concerning certain rescinded policies.

Recent settlements include the following:

      In June 2008, PacifiCare of California agreed to provide health coverage to three
       consumers whose coverage was canceled over the last four years and offered to
       reimburse their past medical claims. In addition, PacifiCare will offer coverage to
       roughly 57 former members going forward and an expedited dispute resolution for
       claims. PacifiCare also must pay a $50,000 fine and faces a stiffer $500,000
       penalty if it fails to take certain corrective action, including instituting clearer
       application forms and a fair, impartial grievance process, within the next year.

      In July 2008, Blue Shield of California agreed to offer coverage to 400 former
       members whose coverage previously was rescinded and pay a total fine of $5
       million. Under the agreement, Blue Shield will pay $3 million upfront, with the
       potential for an additional $2 million if certain corrective actions are not
       implemented, DMHC said.

      Also in July 2008, DMHC announced that Anthem Blue Cross had reached a
       settlement agreeing to pay a $10 million fine and restore health coverage to
       1,770 Californians.

      California Insurance Commissioner Steve Poizner announced September 12, 2008
       a settlement valued at $25 million between the California Department of
       Insurance (CDI) and Health Net Life Insurance Company to offer new healthcare
       coverage to 926 consumers whose individual and family plan policies were
       rescinded during the past four years and halt improper rescissions going forward.
       The settlement resolves allegations of unfair claims handling and improper
       rescission practices made after a market conduct examination of Health Net
       rescissions since 2004. The agreement includes $14.2 million in potential
       payments for legitimate, billed medical charges; $7.2 million in waived insurance
       premiums; and a $3.6 million penalty, Poizner said.

      Poizner announced January 6, 2009 that Blue Shield of California Life & Health
       (Blue Shield) agreed to offer health insurance to 678 former policyholders to
       resolve allegations of unfair claims handling and improper rescission practices.
       According to the Department’s press release, Blue Shield rescinded the policies at
       issue between January 1, 2004 and May 31, 2008 without subjecting them to
       medical underwriting or exclusions for pre-existing conditions. Blue Shield also
       has agreed to reimburse the 678 consumers for all out-of-pocket medical
       expenses that would have been covered under the rescinded policies and
       implement significant changes to its underwriting and claims practices. Blue

       Shield will establish an independent third-party review process for rescissions
       going forward. The insurer is subject to a $5 million penalty if it fails to comply
       with the terms of the settlement.

      In February 2009, Anthem Blue Cross Life and Health Insurance Company
       (Anthem Blue Cross) agreed to offer new health coverage to more than 2,300
       consumers whose policies were rescinded between January 1, 2004 and
       December 31, 2008. CDI said Blue Cross will reimburse the consumers an
       estimated $14 million in out-of-pocket medical expenses and pay a $1 million
       fine. CDI indicated that an independent arbitration process already was in place to
       resolve any disputes about consumers’ medical costs. Anthem Blue Cross also
       agreed to implement significant changes to its application forms, underwriting
       process, agent training, and claims handling practices. As part of the settlement,
       the company, which insures about half of all California consumers with individually
       purchased health insurance policies, also has established an independent third
       party review process for rescissions that is subject to CDI oversight.

      Los Angeles City Attorney Rocky Delgadillo announced February 11, 2009 that
       Health Net, Inc. and two of its subsidiaries agreed to settle allegations that the
       company unlawfully rescinded more than 800 plan members’ policies. The
       settlement resolves the city's civil suit as well as a class action brought by
       attorney William Shernoff. Under the terms of the settlement, policy holders who
       had their coverage rescinded will receive $6.3 million in automatic payments. In
       addition, they will be able to submit claims for reimbursement for out-of-pocket
       medical expenses and will be held harmless for unpaid medical expenses that are
       in active collection, Delgadillo said. Health Net also will pay $2 million in civil
       penalties to the state; make $500,000 in charitable contributions to Padres Contra
       El Cancer (Parents Against Cancer) and the Children’s Health Fund; and adopt a
       new corporate compliance program and abolish any rescission-related bonus
       programs. Further, according to Delgadillo, Health Net agreed to a one-year
       moratorium, through January 31, 2010, during which the company will not
       rescind any plan members or policy holders, and will work to develop an
       independent third-party review process acceptable to its regulators and the City
       Attorney’s Office.

California Appeals Court Holds Insurer Not Entitled To Summary
Judgment On Unlawful Plan Rescission Claims
An insurer who failed to take steps to verify the accuracy of information provided in an
application for insurance may not have “completed medical underwriting” as defined in
state insurance law and therefore was not entitled to summary judgment on claims of
unlawful plan rescission, the California Court of Appeal, Second Appellate District,
Division Four, found November 18, 2008 in an unpublished opinion.

In January 2005, plaintiff Christiane Callil submitted an application for an individual
health plan with defendant California Physicians’ Service d/b/a Blue Shield of California
(Blue Shield).

Because Callil had been covered by Blue Shield in the past, she checked the box on her
application for a plan transfer.

Her application was eventually accepted by Blue Shield. In August 2005, Blue Shield
issued a conditional pre-authorization for a hysterectomy, but also referred the case to its
Underwriting Investigative Unit (UIU).

After requesting Callil’s medical records, the UIU found out that Callil had an undisclosed
history of uterine fibroids among other issues.

It was determined that, based upon Blue Shield’s underwriting guidelines, Blue Shield
would not have extended coverage to Callil had she disclosed her actual medical history.
Accordingly, Blue Shield rescinded Callil’s health plan.

In the meantime, Callil had the hysterectomy based on Blue Shield’s conditional pre-
authorization; she was discharged from the hospital five days before the rescission letter
was sent, incurring more than $50,000 in hospital bills.

Callil sued Blue Shield alleging claims for breach of contract, breach of the duty of good
faith and fair dealing, and declaratory relief.

Blue Shield moved for summary judgment, arguing among other things that Cal. Health
and Safety Code § 1389.3 did not apply because there were no “reasonable questions”
raised by Callil’s application that required resolution before issuance of the plan contract,
and therefore Blue Shield did not engage in post-claims underwriting as defined by
section 1389.3.

The trial court granted the motion and Callil appealed.

A few months after the notice of appeal was filed another California appeals court issued
its decision in Hailey v. California Physicians’ Service, 158 Cal.App.4th 452 (2007).

In that case, the appeals court concluded that “section 1389.3 precludes a health
services plan from rescinding a contract for a material misrepresentation or omission
unless the plan can demonstrate (1) the misrepresentation or omission was willful, or (2)
it had made reasonable efforts to ensure the subscriber’s application was accurate and
complete as part of the precontract underwriting process.”

Further, the Hailey court explained that “An applicant for a health services plan has a
responsibility to exercise care in completing an application. In light of the potentially
catastrophic consequences of an applicant’s error in filling out an application, however,
we believe the Legislature has placed a concurrent duty on the plan to make reasonable
efforts to ensure it has all the necessary information to accurately assess the risk before
issuing the contract, if the plan wishes to preserve the right to later rescind where it
cannot show willful misrepresentation.”

In the instant case, Callil argued the appeals court here should follow Hailey's reasoning
and reverse the summary judgment on the ground that a disputed issue of fact existed
on whether she willfully misrepresented or omitted facts about her medical health.

The appeals court agreed, finding “the record discloses triable issues of fact regarding
whether Callil’s misrepresentations or omissions were willful, and whether Blue Shield
‘complete[d] medical underwriting’ under section 1389.3, as interpreted in Hailey.”

The appeals court found, in addition to Callil’s deposition testimony that she did not
willfully withhold any medical information, a triable issue regarding whether Blue Shield
satisfied its duty to take reasonable steps to confirm the accuracy and completeness of
Callil’s application.

In support of its conclusion, the appeals court pointed to Blue Shield’s failure to take
steps to determine when Callil last saw her physician, even though her answers on her
insurance applications were inconsistent.

The appeals court further refused to allow summary judgment on Callil’s bad faith and
punitive damages claims, rejecting Blue Shield’s argument that a genuine issue over
coverage precluded these claims.

Instead, the appeals court found that “an insurer is entitled to summary judgment based
on a genuine dispute over coverage or the value of the insured’s claim only where the
summary judgment record demonstrates the absence of triable issues [citation] as to
whether the disputed position upon which the insurer denied the claim was reached
reasonably and in good faith.”

Regarding punitive damages, the appeals court found that if “Callil can prove by clear and
convincing evidence that Blue Shield not only rescinded her health plan contract
unreasonably or in bad faith, but in doing so was guilty of malice, oppression or fraud,
she may recover punitive damages.”

Callil v. California Physicians’ Serv., No. B203085 (Cal. Ct. App. Nov. 18, 2008).

Out-of-Network Reimbursement
Health Net Of New Jersey Pays $39 Million To Resolve Charges Of
Making Underpayments For Out-Of-Network Services
Health Net of New Jersey (Health Net) has paid $26 million in restitution and interest to
its members and a $13 million fine, for a total of $39 million, to resolve charges that
it underpaid for out-of-network services for more than a decade, according to an August
26, 2008 press release issued by New Jersey Department of Banking and Insurance
(DOBI) Commissioner Steven M. Goldman.

Goldman indicated the restitution payments were paid out to over 88,000 affected Health
Net members.

After waiving its right to a hearing on DOBI’s restitution order, Health Net agreed to
resolve the matter with the payment of $14 million in unpaid claims and $12 million in
interest on those claims, for a total of $26 million. In addition, Health Net agreed to pay
$2 million in examination fees.

The additional $13 million fine “represents an appropriate penalty for this improper
business practice,” Goldman said.

DOBI first became aware of underpayments made by Health Net in 2002 through a
consumer complaint, according to the release. After the agency conducted an
investigation, it settled with Health Net in December 2002 for more than $800,000 in
restitution for underpayments made from July 2001 - October 2002 to more than 4,700
Health Net members.

When DOBI learned in 2005, however, that Health Net’s underpayments had begun even
earlier than it had disclosed, it re-opened the investigation. DOBI focused on claims paid
by Health Net, of Shelton, Connecticut, and its predecessors, First Option Health Plan of
New Jersey and Physicians Health Services of New Jersey, between 1996 and 2006. The
claims were for out-of-network services provided to Health Net members in New Jersey.

During the investigation, DOBI also discovered that Health Net’s vendors for chiropractic
services, dental services, and mental health services also made underpayments for out-
of-network services provided between 1999 and 2006, according to the release.

“Health Net has acknowledged its responsibility to comply with all applicable laws, and
has overhauled the systems and practices that led to its misconduct,” the release said.

Nonetheless, DOBI said it would continue to monitor Health Net to ensure full payment of
its members for out-of-network services.

New York AG Reaches Substantial Settlements With Insurers Over
Use Of Igenix Database For Paying Out-Of-Network Claims
New York Attorney General Andrew Cuomo over the last year reached a slew of big dollar
settlements with some of the nation’s largest health insurers stemming from their use of
the Ingenix, Inc. database to reimburse out-of-network claims.

Ingenix, Inc., a wholly-owned subsidiary of UnitedHealth Group, is the largest provider of
healthcare billing information in the country.

United and the largest health insurers in the country rely on the Ingenix database to
determine their “usual and customary” rates.

The database uses the insurers’ billing information to calculate the “usual and customary”
rates for individual claims by assessing how much the same, or similar, medical services
would typically cost, generally taking into account the type of service and geographical

Cuomo’s office investigated allegations that the database “intentionally skewed” these
“usual and customary” rates downward through “faulty data collection, poor pooling
procedures, and lack of audits.”

The settlements reached by Cuomo in connection with his industry-wide investigation

      United agreed to close the Ingenix database and pay $50 million to establish a
       new, independent database run by a qualified nonprofit organization.

      In January 2009, Cuomo announced a settlement agreement with Aetna Inc.
       (Aetna) under which the insurer will pay $20 billion towards creating the new,
       independent database. “United and Aetna contributed seventy percent of the
       billing information that made up the Ingenix database,” commented Cuomo.

      Cuomo announced in February 2009 an agreement with the Schenectady-based
       insurer MVP Health Care, Inc., under which it agreed to no longer use the
       "defective and conflict-of-interest ridden" Ingenix database to determine
       reimbursement rates for patients who use out-of-network physicians.

      On February 2, 2009 Cuomo announced that Aetna also agreed to pay more than
       $5 million, plus interest and penalties, for claims involving out-of-network care to
       reimburse health insurance claims by over 73,000 students at over 200 colleges.
       According to Cuomo, an investigation revealed that Aetna Student Health
       underpaid in excess of $5.1 million in student health insurance claims nationwide
       between 1998 and April 1, 2008 by using outdated reimbursement rate
       information from the Ingenix database.

      On February 10, 2009, Buffalo-area insurers, Independent Health and HealthNow
       NewYork, Inc. agreed to end their relationships with Ingenix.

      On February 17, 2009, Cuomo announced an agreement with CIGNA under which
       the insurer will end its use of the Ingenix database. The company also will pay
       $10 million to fund the new, independent database.

      On February 18, 2009, Cuomo announced that he reached a similar settlement
       with WellPoint, Inc., which will pay $10 million toward the new database.

      Guardian Life Insurance Company of America, Excellus Health Plan, and Capital
       District's Physician Health Plan (CDPHP) also reached settlements with Cuomo in
       March 2009. Guardian agreed to end its relationship with the Ingenix database
       and pay $500,000 to fund the new, independent database. Under separate
       agreements, Excellus will pay $775,000 and CDPHP will pay $300,000 toward the
       new, independent database.

AMA Lawsuits
Meanwhile, the American Medical Association (AMA) filed a number of lawsuits against
insurers in connection with their reliance on the Ingenix database.

In January 2009, United agreed to pay $350 million to resolve a class action filed by the
AMA, the Medical Society of New York, other medical associations, and various individual
subscribers and providers.

“For far too long health insurers using the flawed Ingenix database have been able to
increase revenue by underpaying patients’ medical bills,” commented Nancy H. Nielson,
AMA President in a statement. “Insurers will now be held accountable for their payment

Nielson added that the AMA “fully supports” the creation of “a new, reliable database that
is fair to patients and physicians.”

In a statement, United said it did not admit any wrongdoing in agreeing to the
settlements, which cover out-of-network reimbursement policies from 1994 to present.
“UnitedHealth Group believes it is in the best interests of the company to resolve these
matters and move forward.”

AMA along with several state medical associations and a group of individual physicians
also filed separate class actions against Aetna Health, Inc. and CIGNA Corporation
alleging the companies relied on skewed data provided by the Ingenix database to set
unfair reimbursement rates for out-of-network care.

The two lawsuits were filed February 9, 2009 in a New Jersey federal court, alleging
violations of federal antitrust laws and the Racketeer Influenced and Corrupt
Organizations Act, among other claims.

“Through our lawsuits, the AMA and our partner medical societies seek to reform the
payment systems used by Aetna and CIGNA by ending their dependence on the Ingenix
database,” Nielsen said. “The lawsuits also seek relief for physicians who were seriously
harmed by Aetna and CIGNA through the insurers’ long-term use of the flawed Ingenix

In March 2009, AMA and several other medical societies filed a lawsuit against WellPoint,
Inc., the largest health insurer in the United States. The suit, filed in Los Angeles federal
court, alleges that WellPoint colluded with others to underpay physicians for out-of-
network medical services.

Senate Hearing

On March 26, 2009 the Senate Committee on Commerce, Science, and Transportation
held the first of two hearings on deceptive insurance industry practices, including those
related to out-of-network reimbursement.

According to Committee Chairman John D. Rockefeller, IV (D-WV), insurance companies
"have been promising to pay a certain share of consumers’ medical bills, but then they
have been rigging health charge data to avoid paying their fair share."

As a result, "billions of dollars in health care costs have been unfairly shifted" to
consumers, Rockefeller said.

Chuck Bell, Programs Director, Consumers Union, told the panel that Cuomo's
investigation and resulting settlements have been good for consumers.

Bell said Consumers Union is now calling for "coordinated action by state and federal
policymakers and regulators to help consolidate the investigation's gains, and ensure that
the new database for calculating out-of-network charges will be broadly used across the
entire marketplace."

California Court Affirms Ban On Balance Billing
The California Superior Court, Sacramento County, upheld November 21, 2008 in a
tentative ruling California's promulgation of a regulation that would curb the practice of
balance billing emergency care recipients enrolled in a health maintenance organization

The tentative ruling was affirmed by the court and made final on December 2, 2008.

The California Medical Association (CMA) and others filed suit challenging the California
Department of Managed Health Care's (DMHC's) promulgation of 28 CCR § 1300.71.39
(Balance Billing Regulation).

Under Cal. Health and Safety Code § 1371.39, HMOs may report "instances in which the
plan believes a provider is engaging in an unfair billing pattern" to DMHC. The Balance
Billing Regulation defines "unfair billing pattern" to include a practice known as "balance
billing," wherein a provider that receives less than the total amount billed from a patient’s
HMO subsequently bills the unpaid balance directly to the patient.

CMA argued that DMHC acted unlawfully in promulgating the Balance Billing Regulation
and sought a writ of mandate ordering DMHC to repeal it, a declaration that the Balance
Billing Regulation is invalid, and an injunction stopping DMHC from implementing and
enforcing the Balance Billing Regulation.

The court rejected CMA's argument that DMHC lacked statutory authorization to regulate
balance billing by non-contracting providers. The court found that Section 1371.39(b)(1)
expressly delegates authority to DMHC to define unfair billing practices and also
authorizes DMHC to regulate providers with regard to unfair billing practices.

The court also held that "DMHC’s conclusion that balance billing can constitute a
demonstrable and unjust billing pattern is reasonable and not in conflict with § 1371.39."

The court found "substantial evidence in the record supports DMHC’s conclusion that the
Balance Billing Regulation was reasonably necessary to effectuate the purposes of the
Knox-Keene Act."

In addition, contrary to CMA's argument, the court saw no conflict between the Balance
Billing Regulation and another statutory provision requiring that HMO contracts "shall be
fair, reasonable, and consistent with the objectives of this chapter."

"While Petitioners assert that the Balance Billing Regulation will allow HMOs to unilaterally
set provider rates, such an argument is premised on the assumption that HMOs will be
able to underpay non-contracted providers and ignores the legal provisions mandating
both full payment and a provider’s ability to obtain full payment through the dispute
resolution mechanisms or the legal system," the court held.

Lastly, the court found the regulation was not unconstitutionally vague.

DMHC Director Cindy Ehnes said December 3, 2008 that the agency's "legal authority to
protect consumers from bills they should never have received has now been confirmed,
and we will continue to not only defend consumers from being caught in the middle of
billing disputes but also work to ensure that providers are paid fairly and on time."

California Med. Ass'n v. Department of Managed Health Care, No. 34-2008-80000059
(Cal. Sup. Ct. Nov. 21, 2008) (tentative ruling).

California Supreme Court Says ER Physicians May Not “Balance
Bill” Health Plan Subscribers
Emergency room physicians may not “balance bill” patients when billing disputes arise
with health maintenance organizations (HMOs) concerning the charges submitted for
services provided to their enrollees, the California Supreme Court ruled in a unanimous
decision January 8, 2009.

“[W]e conclude that billing disputes over emergency medical care must be resolved solely
between the emergency room doctors, who are entitled to a reasonable payment for their
services, and the HMO, which is obligated to make that payment,” the high court found.

“A patient who is a member of an HMO may not be injected into the dispute,” the high
court added.

The California Medical Association (CMA) criticized the high court’s ruling, saying it
“forces physicians and hospitals to eat the cost of emergency medical care that HMOs
refuse to cover.”

“CMA supports a solution that protects doctors and patients by requiring HMOs to pay the
bill for emergency services. By outlawing balance billing without a realistic remedy,
however, the court has placed another strain on financially struggling emergency rooms
and the physicians who work there,” according to the group’s statement.

Plaintiffs Prospect Medical Group, Inc. (Prospect) are individual practice associations that
contract with California healthcare service plans. Under these contracts, Prospect
provides medical care to members of a health plan who select a Prospect physician.

Under California law, Prospect also must pay for emergency services provided to those
who have subscribed to the healthcare service plans.

Prospect brought an action against two non-contracting emergency providers, defendants
Northridge Emergency Medical Group and Saint John’s Emergency Medicine Specialists,
Inc., seeking a judicial determination that the practice of balance billing health plan
subscribers is unlawful.

The trial court sustained the emergency physicians’ demurrers without leave to amend.
The California Court of Appeal concluded that balance billing is not statutorily prohibited.
Prospect petitioned the high court for review.

Under the Knox-Keene Act, HMOs are required to reimburse emergency room physicians
for emergency services rendered to their subscribers or enrollees. See Cal. Health and
Safety Code § 1371.4.

California law, Cal. Health and Safety Code § 1379, bans healthcare providers who
contract with a health plan from balance billing the health plan’s enrollees for any amount
not paid by the plan. The ban under Section 1379 applies even if the contract “has not
been reduced to writing.”

Prospect argued while it did not have an express contract with defendants, there was an
implied contract that had not been reduced to writing pursuant to Section 1379.

The appeals court rejected this argument, but the high court reversed.

While conceding that Section 1379 did not “readily apply to the precise situation here,”
the high court emphasized that the provision, which the legislature passed in 1975,
should not be viewed in isolation but examined as part of other statutory provisions and
policies, which “strongly suggest that doctors may not bill patients directly when a
dispute arises between doctors and HMO’s.”

For example, the high court noted that Section 1371 requires HMOs to pay for emergency
care and Section 1367 requires HMOs to have dispute resolution mechanisms for non-
contracting providers to resolve billing disputes.

“Interpreting the statutory scheme as a whole, we conclude that the doctors may not bill
a patient for emergency services that the HMO is obligated to pay,” the high court

The high court agreed with defendants that emergency room physicians are entitled to
reasonable payments for emergency services rendered to HMO patients.

“All we are holding is that this entitlement does not further entitle the doctors to bill
patients for any amount in dispute.”

The high court specifically declined to rule on a recent regulation adopted by the
California Department of Managed Health Care defining balance billing as “an unfair
billing pattern.”

In the high court’s view, it owed little deference to the regulation since it was not
contemporaneous with the statutory scheme.

The California Superior Court, Sacramento County, upheld at the end of 2008 the so-
called balanced billing regulation, which CMA had challenged in court.

Prospect Med. Group, Inc. v. Northridge Emergency Med. Group, No. S142209 (Cal. Jan.
8, 2009).

Silent PPOs
U.S. Court In Illinois Questions Breach Of Contract Claim In
“Silent PPO” Case
A federal district court in Illinois ordered June 30, 2008 a healthcare provider to show
cause why her breach of contract action against an indemnity plan should not be

The provider in the case alleged the plan was not entitled to discounted rates for
treatment she provided to one of its insureds because it never established a preferred
provider network that steered the patient to her practice.

The case arose after plaintiff Kathleen Roche, a healthcare provider, treated a patient
who was covered under an indemnity plan offered by defendant Liberty Group (Liberty).

Roche was a participating provider with the First Health Preferred Provider (PPO)
network. Liberty had signed a payor agreement with First Health but had not established
a preferred provider or exclusive provider program for its claimants or beneficiaries.

Thus, Liberty did nothing to steer or direct the patient to Roche.

Roche subsequently submitted a bill for her usual and customary rate to Liberty. After
discovering that Roche was a First Health PPO provider, Liberty tendered payment at the
PPO discounted rate.

Roche sued Liberty, alleging breach of contract, unjust enrichment, and violation of the
Illinois Consumer Fraud Act. Liberty moved to dismiss the breach of contract action.

The U.S. District Court for the Southern District of Illinois said the case fell under the
“silent PPO” scenario because Liberty paid the discounted PPO rates even though, as an
indemnity plan, it did not by definition “steer” patients to Roche.

The court said the express terms of Roche’s provider agreement with First Health seemed
to preclude her breach of contract claim because it specifically included indemnity plans
like Liberty in the definition of “Health Care Payors” entitled to the discount even if they
were not a PPO-type plan.

According to the court, implying a “steerage obligation” in the contract as Roche urged
would likely contradict the express terms in the provider agreement.

Roche alternatively argued that without an implied steerage term the contract would fail
for lack of consideration. But the court discounted this claim, noting the provider
agreement’s requirement for prompt payment would constitute adequate consideration.

The court ultimately concluded, however, that the parties had not adequately briefed
these issues and ordered Roche to show cause why her breach of contract action should
not be dismissed.

Roche v. Liberty Mut. Managed Care, Inc., No. 07-cv-331-JPG (S.D. Ill. June 30, 2008).

U.S. Court In Illinois Refuses To Certify Class In Healthcare
Provider’s Action Alleging “Silent PPO” Scheme
A federal court in Illinois denied class certification in a healthcare provider’s action
alleging a preferred provider organization (PPO) administrator and various payors
engaged in a fraudulent scheme that breached the provider's PPO contract.

The action was initiated by plaintiff Christie Clinic P.C. against defendants MultiPlan Inc.,
a PPO Administrator, Unicare Life and Health Insurance Company (Unicare), and United
Health Care Insurance Company (United).

Plaintiff sought to bring the complaint on behalf of physicians, hospitals, and patients who
entered into agreements to participate in the MultiPlan PPO network.

According to plaintiff, MultiPlan agreed to market its provider networks to payors that
offered patients financial incentives for using in-network providers like plaintiff. In return
for discounted rates, payors would "steer" their members to the participating preferred
providers thereby increasing the volume of the providers’ business.

Plaintiff claimed that MultiPlan secretly contracted with Unicare and United to create a so-
called “silent PPO”—i.e., allowing these payors access to the discounted reimbursement
rates without having to offer financial incentives and other policies aimed at steering
patients to those providers.

Plaintiff alleged numerous claims including civil conspiracy, breach of contract, and unjust
enrichment and moved for class certification of an estimated 500,000 healthcare
providers who through the MultiPlan PPO Provider Agreement were allegedly defrauded
by the silent PPO scheme.

The U.S. District Court for the Central District of Illinois refused to certify the class and
also dismissed plaintiff’s claims for injunctive relief and punitive damages.

The court found plaintiff had not satisfied a number of requirements for class certification,
including typicality, adequate representation, predominance, and superiority.

First, the court held plaintiff’s fraud-based claims were not typical of the claims of the
putative class members because plaintiff’s contract with MultiPlan expressly permitted
“complimentary network” clients like United and Unicare to provide reimbursement for
plaintiff’s services to its members at out-of-network benefit levels.

“This unique feature of Plaintiff’s contract requires Plaintiff to base its claim on allegedly
fraudulent misrepresentations made by Defendants to Plaintiff,” the court observed.

Moreover, defendants pointed to “course of dealing” evidence that plaintiff had submitted
claims directly to United and received payments reflecting the “complimentary network”
discounts but had not previously complained about the payor’s participation.

There was no evidence that other PPO providers would face similar obstacles in pressing
plaintiff’s theory, the court said.

The court found similar reasons prevented plaintiff from showing that it would fairly and
adequately protect the interests of the class given the unique burdens and defenses
plaintiff faced on its individual claims.

In addition, the court agreed with defendants that plaintiff’s claims of fraud would require
proof from each class member.

The court also concluded defendants had shown the contracts between MultiPlan and the
proposed class members were materially different from the contract between MultiPlan
and plaintiff such that the issues common to the class members did not predominate over
questions affecting individual class members.

Finally, the court concluded that in this case, a class action was not superior to other
means of addressing class members’ alleged claims, noting class members had an
important interest in bringing individual actions.

Christie Clinic, P.C. v. MultiPlan, Inc., No. 08-CV-2065 (C.D. Ill. Jan. 26, 2009).

Long Term Care

CMS Final Rule Requires Sprinkler Systems In All Long Term
Care Facilities
Long term care facilities will have five years to comply with a new rule requiring them to
install sprinkler systems throughout their buildings to continue to serve Medicare and
Medicaid beneficiaries, the Centers for Medicare and Medicaid Services (CMS) said in June

The final rule was published in the August 13, 2008 Federal Register (73 Fed. Reg.

Under current rules, all newly constructed facilities and all facilities that undergo major
renovations must install automatic sprinkler systems. Existing facilities, however, are not
required to install automatic sprinkler systems provided they meet certain construction
standards. Also, renovated facilities are only required to install sprinklers in the
renovated portion of the facility.

“In the past, certain older facilities were exempt from having an automatic sprinkler
system, but we now will hold all 16,000 nursing homes in the nation to this standard,”
CMS Acting Administrator Kerry Weems said.

CMS said all new sprinkler systems installed as a result of its final rule will have to meet
National Fire Protection Association technical specifications.

To comply with the rule, facilities must have sprinkler coverage in all areas, including
resident rooms; kitchen, dining, and activity areas; corridors; attics; canopies;
overhangs; offices; waiting areas; closets; storage areas for trash and linen; and
maintenance areas.

"By publishing final regulations on sprinkler systems in nursing homes, CMS has solidified
an important effort to better safeguard the nation's most vulnerable citizens in the event
of a fire at their nursing residence," Senate Finance Committee Ranking Member Charles
Grassley (R-IA) said in a statement.

CMS noted in the final rule that it received a large number of comments regarding the
appropriate phase-in period for the rule. While suggestions ranged in length from 18
months to 15 years, "the most frequently suggested phase-in period was 3-5 years."

"A 5-year phase-in period balances our dual goals of improved fire safety and feasibility,"
the final rule said.

CMS Posts Quality Ratings For Nation’s Nursing Homes
Consumers will now be able to compare nursing home quality and safety based on a new
“five-star” rating system, the Centers for Medicare and Medicaid Services (CMS)
announced December 18, 2008.

CMS this week posted ratings of the nation’s 15,800 nursing homes on its Nursing Home
Compare website.

According to CMS, in the first round of quality ratings about 12% of nursing homes
received a five-star rating, while 22% were assessed one star.

CMS announced in June 2008 plans for the rating system, which is part of the agency’s
efforts to give patients and families better tools to compare nursing home quality.

Facilities are assigned star ratings from a low of one star (“much below average”) to a
high of five stars (“much above average”) based on health inspection surveys, staffing
information, and quality of care measures, CMS explained.

Ratings, which will be updated monthly, are given in each area and then totaled for a
composite score.

“With this new rating system, CMS is improving the ability of consumers to readily obtain
critical information which should be used in conjunction with in-person visits to a facility,”
said Senate Special Committee on Aging Chairman Herb Kohl (D-WI).

CMS Acting Administrator Kerry Weems cautioned that the ratings system is only a
snapshot of a nursing home at a particular point in time and should not be used as a
substitute for visiting a nursing home.

“Nursing homes can make dramatic improvements between rating periods, just as a
previously highly-rated home could see its quality of care deteriorate,” Weems observed.

CMS previously published on its website a list of the nation’s underperforming nursing
homes, or “Special Focus Facilities.”

OIG Finalizes Supplemental Compliance Program Guidance For
Nursing Facilities
The Department of Health and Human Services Office of Inspector General (OIG) issued
September 30, 2008 in the Federal Register (73 Fed. Reg. 56832) final supplemental
compliance program guidance for nursing facilities.

The voluntary guidance, which was issued in draft form in April 2008, is intended to
supplement, rather than replace, OIG nursing facility compliance guidance issued in

The OIG said it received seven comments, all from trade associations, on the draft
guidance and the final document reflects certain suggested clarifications and
modifications made by those stakeholders.

In the draft guidance, the OIG also sought suggestions regarding specific measures of
compliance effectiveness tailored to nursing facilities. “We did not receive suggestions
proposing such measures, and therefore did not include an effectiveness measures
section in the final supplemental [compliance program guidance],” the OIG said.

“The new guidance reflects the OIG’s increased focus on quality of care for nursing home
residents, as well as our longstanding commitment to safeguarding Medicare and
Medicaid program funds and beneficiaries through fraud and abuse prevention efforts,”
said Inspector General Daniel R. Levinson in a press release.

Reflecting the emphasis on quality concerns, the new guidance focuses on areas such as
staffing, resident care plans, medication management, appropriate use of psychotropic
medications, and resident safety.

The guidance also stresses claims accuracy and discusses issues related to reporting
resident case-mix data, therapy services, screening for excluded individuals and entities,
and restorative and personal care services, the OIG said.

The supplemental guidance includes sections on fraud and abuse risk areas that are
particularly relevant to nursing facilities, recommendations for establishing an ethical
culture and for assessing and improving an existing compliance program, and actions
nursing facilities should take if they discover potential misconduct.

Over 91% Of Nursing Homes Cited For Deficiencies, OIG Says
In each of the last three years, over 91% of nursing homes were cited for deficiencies,
with private nursing homes receiving more citations than not-for-profit and government
nursing homes, according to a memorandum report issued September 29, 2008 by the
Department of Health and Human Services Office of Inspector General (OIG) to Centers
for Medicare and Medicaid Services (CMS) Acting Administrator Kerry Weems.

According to the report, Trends in Nursing Home Deficiencies and Complaints (OEI-02-
08-00140), quality of care, resident assessment, and quality of life were the most
common deficiency categories cited.

The OIG also reported that 17% of nursing homes surveyed in 2007 were cited for actual
harm or immediate jeopardy deficiencies, and 3.6% were cited for substandard quality-
of-care deficiencies—up slightly from 2005.

The report was based on nursing home surveys conducted in 2005, 2006, and 2007 and
complaints for those years that were included in CMS’ Online Survey and Certification
Reporting System (OSCAR).

The OIG said deficiency rates varied widely among states, ranging in 2007 from 76% in
Rhode Island to 100% in Alaska, the District of Columbia, Idaho, and Wyoming.

Also in 2007, 94% of for-profit nursing homes surveyed were cited for deficiencies,
compared to 88% of not-for-profit and 91% of government nursing homes.

“We note that many factors in addition to quality of care may affect deficiency rates.
These factors may include an increase in enforcement, additional guidance or training
from States and CMS, legislative changes, and State surveyor practices,” the OIG said.

Florida High Court Rules Patient Right To Know Amendment
Does Not Apply To Nursing Homes
A constitutional amendment passed by Florida voters that gives patients the right to
access information from healthcare providers about adverse medical incidents does not
apply to nursing homes, the Florida Supreme Court ruled December 23, 2008.

The high court found “nursing homes” or “skilled nursing facilities” do not fall within the
definition of “healthcare facility” or “healthcare provider” as used in the “Patients Right To
Know Amendment,” or Amendment 7.

Florida voters in 2004 approved Amendment 7, which provides that “patients have a right
to have access to any records made or received in the course of business by a health
care facility or provider relating to any adverse medical incident.”

In a March 2008 decision, the Florida high court held the amendment applies
retroactively to existing medical records, trumping any previous statutory protections
limiting discovery during litigation, (Florida Hosp. Waterman, Inc. v. Buster, Nos. SC06-
688, SC06-912 (Fla. Mar. 6, 2008)).

The instant case came to the high court on a certified question from the Fourth District
Court of Appeals.

Jodi Benjamin, as personal representative of Marlene Gagnon’s estate, sued nursing
home Tandem Healthcare, Inc. alleging Gagnon received negligent care.

Benjamin sought from Tandem adverse incident reports involving Gagnon, as well as peer
review documents and quality assurance records. Benjamin contended Amendment 7
abrogated the nursing home’s peer review and quality assurance privileges.

While the trial court granted Benjamin’s request, the Florida Fourth District Court of
Appeals concluded Amendment 7 did not encompass nursing homes because it defined
“healthcare facility” and “health care provider” in terms of the “general law related to
patient’s rights and responsibilities."

According to the appeals court, the term “patient’s rights and responsibilities” was a
specific reference to Fla. Stat. § 381.026, titled “Florida Patient’s Bill of Rights and
Responsibilities.” This section, the appeals court said, does not apply to nursing homes.

In its analysis, the high court agreed with the appeals court’s reasoning, finding the
amendment’s specific use of the phrase “patient’s rights and responsibilities” was an
intentional reference to Section 381.026, which therefore excluded the amendment’s
application to nursing homes.

As further support, the high court noted the amendment’s use of the term “patient” and
not “resident” in light of the long-standing distinction between the two. Moreover, the
high court observed, nursing home residents have their own enumeration of rights in a
separate chapter of the Florida Statutes.

Benjamin v. Tandem Healthcare, Inc. No. SC07-243 (Fla. Stat. Dec. 23, 2008).

U.S. Court In Louisiana Blocks Termination Of Nursing Home’s
Medicare And Medicaid Provider Agreements
A federal court in Louisiana granted nursing home Oak Park Health Care Center, LLC a
temporary restraining order (TRO) preventing the federal government from terminating
its Medicaid and Medicare provider agreements on February 11, 2009 as scheduled.

The court in a February 10, 2009 opinion rejected the government’s argument that Oak
Park could not seek judicial review because it had failed to exhaust its administrative

Here, Oak Park argued the government would violate the nursing home’s procedural due
process rights by terminating the provider agreements before an administrative law judge
(ALJ) hearing could take place.

The court noted other decisions holding similar procedural due process claims were
“wholly collateral to the determination of benefits” and therefore justified waiving
administrative exhaustion requirements.

Moreover, the court said the fact Oak Park would likely have to close following the
termination of its provider agreements posed a sufficient threat of irreparable harm to
current residents, many of whom suffer from serious mental and physical impairments.

“Terminating provider benefits to a nursing home would require an extremely vulnerable
population to undergo the trauma of moving to a new facility,” the court noted.

The court also took into account the impact on family members to relocate residents as
well as the effect a closure would have on Oak Park employees “in today’s fragile
economic climate.”

According the court, the government would not incur harm from the TRO, nor would it
disserve the public interest.

Finally, the court concluded Oak Park had presented a sufficiently substantial case that it
could prevail on the merits after exhausting its administrative remedies.

The case arose after the Centers for Medicare and Medicaid Services (CMS) found Oak
Park, which operates a 177-bed skilled nursing facility in Lake Charles, Louisiana, was not
in substantial compliance with federal requirements over the course of an initial survey
and three re-visits.

Following the fourth visit, CMS informed the nursing home on January 27, 2009 that it
was recommending the termination of its Medicare provider agreements in 15 days—later
extended to February 11, 2009. On February 5, 2009, Oak Park allegedly received notice
that its Medicaid provider agreement would be terminated on February 11 as well.

Oak Park appealed the decision to the ALJ and filed for expedited review, but the review
was not scheduled before the February 11, 2009 termination date.

Oak Park Health Care Ctr., LLC v. Johnson, No. 09-CV-217 (W.D. La. Feb. 10, 2009).

Seventh Circuit Affirms Dismissal Of Claims Against Nursing
Home Inspectors
The Seventh Circuit affirmed February 19, 2009 a lower court’s grant of summary
judgment to survey inspectors from the Indiana health department after they were sued
by a nursing home that was initially cited for 17 violations, 16 of which were dismissed
after administrative review.

Although the inspectors were perhaps overzealous or unprofessional, the appeals court
found, the nursing home could not sufficiently prove the inspectors acted with malice.

Golden Years Homestead, Inc. operates a licensed nursing facility and participates in the
Medicaid program.

Golden Years underwent a series of surveys in 2000 by the Indiana State Department of
Health during which the inspectors were reportedly hostile and aggressive.

Golden Years was cited for 17 Medicaid participation and state licensing violations. All but
one of the citations were eventually dismissed after administrative and judicial review.

Golden Years sued the inspectors and certain of their supervisors (collectively,
defendants) asserting violations of its Fourth and Fourteenth Amendment rights, along
with claims under Indiana law for abuse of process and malicious prosecution.

Defendants moved for summary judgment and the district court granted the motion.
Golden Years appealed.

The appeals court first addressed Golden Years’ argument that the court improperly
entered summary judgment on the state law claims sua sponte.

The appeals court noted the basis for the inspectors’ motion was that Golden Years’
evidence was insufficient to establish that the inspectors had behaved unreasonably or
arbitrarily, harbored any improper motive or personal animus, or otherwise engaged in
behavior that shocked the conscience.

While acknowledging defendants did not develop an argument on the substance of the
malicious prosecution or abuse of process claims, the appeals court found defendants did
specifically ask for dismissal of all the claims in the lawsuit.

After finding the lower court’s exercise of jurisdiction over the state law claims
procedurally proper, the appeals court also concluded the dismissal was substantively

As to its claim for malicious prosecution, the appeals court found Golden Years failed to
offer sufficient evidence of personal animus, noting that the evidence presented may
“suggest that the inspectors were overzealous, overbearing, and unprofessional, but not
that they were motivated by personal animus.”

The appeals court also held Golden Years’ evidence did not prove an ulterior motive as
required to prove its abuse of process claim.

Golden Years Homestead, Inc. v. Buckland, No. 07-1100 (7th Cir. Feb. 19, 2009).

U.S. Court In Minnesota Dismisses Action Against Nursing Home
For Allegedly Misrepresenting Quality Of Care
A federal court in Minnesota dismissed March 4, 2009 an action against nursing home
operators asserting claims under state consumer protection laws for allegedly making
false representations about the quality of care at their facilities.

The court held statements regarding quality made by defendants Extendicare Health
Services, Inc. and Extendicare Homes, Inc., which own and operate nursing homes in
numerous states including Minnesota, on their website and in their admission agreements
amounted to non-actionable “puffery.”

Plaintiff Laura Bernstein is a resident of a Minnesota nursing home owned by defendants.
Bernstein asserted claims under the Minnesota Prevention of Consumer Fraud Act, the
Deceptive Trade Practices Act, and the False Statement in Advertisement law.

According to Bernstein, defendants misrepresented the quality and character of the
services provided at their nursing home facilities in violation of the consumer protection

For example, plaintiff pointed to statements on defendants’ website that they have
always “maintained quality standards above government regulations” and have “rigorous
standards to ensure” they meet residents’ needs.

Plaintiff argued defendants in fact do not operate their nursing homes in accordance with
applicable legal standards, and that care is particularly poor for Medicaid patients.
Plaintiff also asserted the action was appropriate for class action status.

The U.S. District Court for the District of Minnesota granted defendants’ motion to
dismiss, agreeing the statements at issue constituted non-actionable “puffery” rather
than fraud.

The court cited a Seventh Circuit decision finding a generic promise to provide high
quality care was puffery and therefore not something a reasonable person would rely on.
See Corely v. Rosewood Care Ctr., Inc. of Peoria, 388 F.3d 990 (7th Cir. 2004).

The court contrasted general statements that care will be of high quality with those
promising continuing care and services under a specifically identified program, which
could support a consumer protection claim.

Here, “[n]one of the statements references any particular standard or make any specific
promise,” the court observed.

Moreover, statements in admissions agreements that services will be provided “as
required by law” are redundant since nursing homes must provide care under a
comprehensive regulatory scheme.

The court acknowledged that plaintiff could have other claims against defendants if they
in fact failed to provide adequate care to residents.

But a consumer protection action “simply is not the path to resolution of those issues,”
the court held.

The court also denied plaintiff leave to amend.

Bernstein v. Extendicare Health Servs., Inc., No. 08-5874 (Minn. Mar. 4, 2009).

CMS Lacks Effective Oversight Of State Survey Activities, Senators
Introduce Nursing Home Quality Bill
The Government Accountability Office (GAO) recommended in a report that the Centers
for Medicare and Medicaid Services (CMS) reexamine its oversight of state survey
activities of Medicare and Medicaid participating facilities, including how such surveys are
funded and conducted.

The report, released March 19, 2009, was addressed to Senators Charles Grassley (R-IA)
and Herb Kohl (D-WI).

To ensure the quality of care at facilities participating in Medicare and Medicaid, CMS
contracts with states to conduct periodic surveys and complaint investigations.

Federal spending on such activities totaled about $444 million in fiscal year 2007, GAO
said. Nonetheless, in inflation-adjusted terms, funding fell 9% from fiscal years 2002
through 2007, the report noted.

The report found that for some facilities without statutory survey frequencies, CMS
increased the time between surveys from six years to 10 years—“a schedule that may
further increase the chance of undetected quality problems.”

At the same time, the report said, CMS incorporated a risk-based system for prioritizing
surveys of the most problematic facilities.

However, about 13% of facilities had not been surveyed by states in six years or more as
of September 30, 2007, GAO said.

In addition, almost all states were unable to meet CMS survey priorities across the top
tiers in fiscal years 2006 and 2007, the report found.

GAO said that “several factors such as workload, funding, staffing, and management may
have affected states’ ability to complete these priorities and the quality of the surveys

Further, GAO noted that it could not determine the extent to which funding has affected
the states’ completion of top-tier surveys “because CMS and states disagree about
whether funding is sufficient to complete surveys in these tiers and several states that
spent more than their initial allocations still did not complete all such surveys.”

The report also concluded that CMS’ oversight of states’ use of survey funds is limited
because it relies on state-reported data, has inadequate information about non-Medicaid
state funding, and does not require states to justify supplemental funding requests.

Meanwhile, Senators Grassley and Kohl reintroduced March 19, 2009 the Nursing Home
Transparency and Improvement Act.

The bill would enable state and federal regulators to identify all persons and entities with
a significant ownership interest in a nursing home, or that play an important role in the
management, financing, and operation of a home, according to a summary of the bill.

In addition, the bill would require nursing homes to develop internal quality assurance
and performance improvement standards to monitor and improve the quality of care
provided to residents and improves and expands the Nursing Home Compare website.

The legislation also would provide transparency in nursing homes' expenditures on direct
care by modifying skilled nursing facility cost reports to require that they separately
account for staffing, the summary indicated.

U.S. Court In Washington Dismisses Suit Alleging Nursing Homes
Violated Consumer Protection Law
The U.S. District Court for the Western District of Washington dismissed March 24, 2009
claims against defendant nursing homes under the state’s consumer protection law,
finding plaintiffs could not establish a compensable injury under the statute.

In dismissing plaintiffs’ claims that misleading advertisements by the nursing homes
violated state law, the court found plaintiffs suffered no monetary injury and could not
prove that the advertisements caused them to choose defendants’ nursing homes.

Howard Steele filed a class action complaint against defendants Extendicare Health
Services, Inc., Extendicare Homes, Inc., and Fir Lane Terrace Convalescent Center, Inc.
alleging they violated the Washington Consumer Protection Act (CPA) by failing to
operate their nursing homes in conformity with their representations and advertisements
made to the general public and prospective residents.

According to Steele, defendants intentionally misrepresented that their nursing homes
met the needs of their residents.

Defendants removed the case to federal court. Steele then filed an amended complaint,
which added former nursing home residents Janette Grieb and Sharon Gunderson as
plaintiffs. Steele was subsequently voluntarily dismissed from the lawsuit, leaving Grieb
and Gunderson as plaintiffs.

Defendants moved for summary judgment.

To establish a CPA violation, plaintiffs had to prove five elements: (1) an unfair or
deceptive act or practice that (2) occurs in trade or commerce, (3) impacts the public
interest, (4) and causes injury to the plaintiff in her business or property, and (5) the
injury is causally linked to the unfair or deceptive act.

At issue here were the fourth and fifth elements. The court explained that under the
fourth element, the injury must be to business or property; personal injuries are not
compensable under the CPA.

Here, the court agreed with defendants’ argument that plaintiffs could not establish any
injury that met the CPA standard.

The court noted plaintiffs complained of exclusively emotional distress or psychological
harm and neither plaintiff had shown that she suffered pecuniary losses of any sort.

The court remained unconvinced that plaintiffs could establish, as they argued, that they
had property rights in their insurance and Medicaid and disability benefits and that they
lost part of the value of those property rights when they received lesser-quality services
than they were promised.

In addition, the court found plaintiffs could not establish the causation element under the

According to the court, the undisputed facts as established at plaintiffs’ depositions
showed that defendants’ advertising and any other alleged misrepresentations actually
played no role whatsoever in plaintiffs’ decisions to stay in defendants’ nursing homes
and therefore could not be the cause of any alleged harm.

The court also found no merit in plaintiffs’ argument that they were not told about
defendants’ history of violating state health statutes and regulations as cited by the
Department of Social and Health Services, and that if they had been aware of these
violations, they would not have selected defendants’ facilities.

Instead the court found defendants “satisfied any duty to disclose by making their
regulatory history easily available to Plaintiffs and the general public pursuant to federal
and state law.”

Steele v. Extendicare Health Servs., Inc., No. C08-1332-JCC (W.D. Wa. Mar. 24, 2009).


Case Law
U.S. Court In Pennsylvania Finds Medicaid “Freedom Of Choice”
Provision Creates Enforceable Right Under § 1983
The Medicaid freedom of choice provision, 42 U.S.C. § 1396n(c)(2)(C), creates an
enforceable right under 42 U.S.C. § 1983, a Pennsylvania federal district court ruled in an
action brought by a mentally challenged woman and her parents against state Medicaid

Plaintiff Leah Zatuchni, a 22-year-old woman who suffers from multiple ailments, sued a
county board of commissioners (board) and county health officials, alleging, among other
things, violations of § 1396(c)(2)(C), which requires states to inform mentally retarded
individuals who are likely to need the level of care provided in a hospital, nursing facility,
or intermediate care facility “of the feasible alternatives . . . to the provision of . . .
services in an intermediate care facility . . . .”

The case arose after county health officials concluded that Medicaid would not cover
plaintiff’s placement at a Delaware residential facility that her parents said best met her
needs. Plaintiff contended the officials failed to advise her of any alternative care options.

The officials argued that the freedom of choice provision did not create an enforceable
right, but the U.S. District Court for the Eastern District of Pennsylvania disagreed.

The court found the provision at issue easily met the test set forth by the Supreme Court
in Blessing v. Freestone, 520 U.S. 329 (1997).

Specifically, the court found that: Congress intended the provision to benefit individuals
like plaintiff, the rights to be informed of feasible alternatives for their care and to choose
the type of available services they will receive are clearly delineated and are not “vague
or amorphous,” and the provision is couched in mandatory terms.

The court also found Congress used “rights-creating language” in the provision at issue.
Although the provision informs the state of its compliance requirements, it does not focus
solely on the state but also on the individuals it protects.

"[W]e find that the specific entitlements conferred by the free choice provision—to be
informed of feasible health care options and to choose from those options—could not be
clearer,” the court held.

Finally, the court found no indication Congress either expressly or by providing a
comprehensive remedial scheme intended to preclude individual suits under the statute
at issue. Thus, the court refused to dismiss this portion of the complaint.

Zatuchni v. Richman, No. 07-cv-4600 (E.D. Pa. Aug. 12, 2008).

Ninth Circuit Issues Opinion Explaining Earlier Order Allowing
Suit To Enjoin 10% Reduction In Medi-Cal Payments
The Ninth Circuit issued September 17, 2008 an opinion explaining its rationale for
reversing the denial of a preliminary injunction to enjoin the California Department of
Health Care Services (DHCS) from implementing a 10% reduction in Medi-Cal’s
reimbursement rates for certain providers.

The appeals court’s July 11, 2008 order had temporarily enjoined DHCS from
implementing the Med-Cal reduction, finding the district court had committed legal error
in denying plaintiffs a preliminary injunction to block the reduction in Medi-Cal payments
called for under a state law (AB 5) passed by a special session of the California
Legislature in February 2008.

Independent Living Center of Southern California, the Gray Panthers of Sacramento and
San Francisco, along with multiple pharmacies (plaintiffs) sued DHCS alleging AB 5
violated the federal Medicaid Act, specifically 42 U.S.C. § 1396a(a)(30)(A), and therefore
was invalid under the Supremacy Clause of the U.S. Constitution.

Under § 1396a(a)(30)(A), a state Medicaid plan must provide payments that “are
sufficient to enlist enough providers so that care and services are available under the
plan at least to the extent that such care and services are available to the general
population in the geographic area.”

DHCS argued that § 1396a(a)(30)(A) did not confer a private right of action that plaintiffs
could sue to enforce.

According to established case law, the appeals court said, under the Supremacy Clause a
plaintiff may “enjoin the implementation of a state law allegedly preempted by federal
statute, regardless of whether the federal statute at issue confers an express ‘right’ or
cause of action on the plaintiff.”

In its September 17 opinion, the Ninth Circuit rejected the district court’s earlier
conclusion that the Shaw Supremacy Clause doctrine did not apply to the case. See Shaw
v. Delta Air Lines, Inc. 463 U.S. 85 (1983) (holding a plaintiff seeking injunctive relief
from state regulation on the grounds of federal preemption under the Supremacy Clause
presents a federal question).

The appeals court found instead that Shaw’s reach was expansive, holding that
“injunctive relief is presumptively available to remedy a state’s ongoing violation of
federal law.”

The Ninth Circuit also found in its latest opinion that plaintiff medical providers and
beneficiaries had Article III standing because they alleged a direct economic injury that
was directly traceable to DHCS’ implementation of AB 5 and could be redressed by the
court through an injunction blocking the 10% rate reduction.

Following the appeals court’s July 11 order, the U.S. District Court for the Central District
of California granted a preliminary injunction to most of the plaintiffs (physicians,
dentists, pharmacists, adult day healthcare centers, clinics, health systems, and other
providers) blocking the 10% cut in Medi-Cal rates.

Independent Living Ctr. of S. Cal., Inc. v. Shewry, No. 08-56061 (9th Cir. Sept. 17,

California Appeals Court Finds Freeze On Hospital Medi-Cal Rates
Violated Federal Medicaid Law
A freeze on California’s Medi-Cal rates for certain noncontract hospital services during the
state’s 2004-2005 fiscal year violated federal Medicaid law requiring public notice and
comment when revising reimbursement rates, a state appeals court held November 19,

The appeals court concluded federal Medicaid law applied to the state legislature’s action
under the principle of “cooperative federalism.” The appeals court found in this case the
“truncated” legislative process that resulted in the rate freeze did not satisfy the federal
notice and comment requirements. Thus, the appeals court enjoined implementation of
the rate freeze.

In 2004, the California Legislature, as part of adopting a state budget after the
constitutional budget deadline had expired, proposed and enacted over a three-day
period a freeze on the Medi-Cal rates for certain “noncontract” hospital services during
the state’s 2004-2005 fiscal year.

The freeze was enacted July 29, 2004 and was effective retroactively to costs incurred
beginning July 1, 2004.

One legislative analysis pegged savings for the state as a result of the measure at $3.1
million, with a total estimated impact on noncontract hospitals projected at $6.2 million,
counting the portion of Medicaid expenditures attributable to the federal government.

A hospital reimbursement expert, however, estimated the freeze would actually reduce
noncontract hospitals' reimbursement by more than $53 million, or about 14.5%.

Over 100 California noncontract hospitals challenged the rate freeze, claiming the state’s
action violated the federal Medicaid statute that requires a public notice and comment
period as part of the process used when revising rates and rate methodologies. See 42
U.S.C. § 1396a(a)(13)(A).

Section (13)(A) formerly imposed a substantive requirement on the states’ establishment
of reimbursement rates (i.e. that the rates were “reasonable and adequate to meet the
costs which must be incurred by efficiently and economically operated facilities").

This requirement, known as the Boren Amendment, was later repealed to allow states
more flexibility in rate setting.

A regulation corresponding to this provision, 45 C.F.R. § 447.50, which remains in effect,
imposes certain notice requirements the state must follow in developing reimbursement

Current section (13)(A) requires only that the state plan provide a “public process” for
determining rates of payment.

The trial court rejected the hospitals’ claims, except to the extent the rate freeze was
applied retroactively.

The California Court of Appeal, Third Appellate District, reversed.

The California Department of Health Care Services (Department), which administers the
state’s Medicaid program, known as Medi-Cal, argued that section (13)(A) did not apply
to legislatively, as opposed to administratively, mandated rate changes.

But the appeals court disagreed, finding the issue with respect to the Medicaid statute
was one of “cooperative federalism,” not administrative law.

“In short, by agreeing to participate in the Medicaid program, the state subjected itself
under the supremacy clause to comply with all federal Medicaid laws,” the appeals court

After concluding that section (13)(A) applied, the appeals court next considered whether
the legislative process itself was sufficient to satisfy the notice requirement.

Examining relevant case law, the appeals court noted that generally the legislative
process meets the notice requirement if the mandate gave little discretion to the
implementing agency, and “if actual public notice was given before the measure became

In the instant case, however, the “truncated” legislative process did not provide notice
and opportunity for review and comment.

“Section 32 of Senate Bill No. 1103 appeared on July 27, was adopted by the full
Assembly on July 28, and was adopted by the full Senate on July 29. Even the
Department did not know of section 32 until it was enacted,” the appeals court observed.

Given this holding, the appeals court did not reach the hospitals' other argument that the
state also violated 42 U.S.C. § 1396a(a)(30)(A), which requires the state to make
certain substantive findings when establishing rates. The appeals court said, however,
that it would apply the same reasoning to its analysis of that section.

Mission Hosp. Reg’l Med. Ctr. v. Shewry, No. C054868 (Cal. App. Ct. Nov. 19, 2008).

U.S. Court In California Enjoins Planned Medi-Cal Pharmacy
Reimbursement Rate Cuts
The U.S. District Court for the Central District of California granted a preliminary
injunction February 27, 2009 preventing the state from implementing planned Medi-Cal
pharmacy reimbursement rate cuts.

The plaintiffs proved a sufficient likelihood of succeeding on the merits of their claim that
the law calling for the rate cuts is preempted by Section 30(A) of the Medicaid Act, the
court found in granting the injunction.

On September 16, 2008, the California Legislature passed a bill (AB 1183), which
provided that, effective March 1, 2009, Medi-Cal reimbursement payments to some fee-
for-service providers would be reduced by 1% or 5%, depending on provider type.

The court noted the reductions mandated in AB 1183 replaced the 10% rate reduction
put into place by AB 5, which was partially enjoined by the court in a related action,
Independent Living Center of Southern California, Inc. v. Sandra Shewry, No. CV-08-
3315 CAS (MANx) (C.D. Cal. Aug. 18, 2008).

In the instant case, Managed Pharmacy Care and others (plaintiffs) sued defendant David
Maxwell-Jolly, Director of the California Department of Health Care Services, challenging
the 5% Medi-Cal reimbursement rate reduction to providers of pharmacy services under
AB 1183.

After finding plaintiffs had standing to bring the action and the action was not barred by
the Eleventh Amendment, the court addressed plaintiffs’ likelihood of success on the
merits of their claim that AB 1183 is preempted by Section 30(A) of the Medicaid Act.

The court found that under Orthopaedic Hospital v. Kizer, 1992 WL 345652 (C.D. Cal.
1992), and its progeny, when California seeks to modify reimbursement rates for
healthcare services provided under the Medi-Cal program, it must consider efficiency,
economy, and quality of care, as well as the effect of providers’ costs on those relevant
statutory factors.

Here, the court agreed with plaintiffs’ argument that AB 1183 did not take into
consideration all the relevant factors.

The court noted “the legislative history shows no indication that the Legislature
considered any of the relevant factors before implementing AB 1183 . . . . Instead, it
appears that the Legislature enacted the rate reduction purely for budgetary reasons.”

Accordingly, the court found plaintiffs had a strong likelihood of success on the merits.

Next, the court found plaintiffs had shown they would suffer irreparable harm if the rate
reduction went into effect.

Declarations submitted by plaintiffs examining the impact of the 5% rate reduction on
pharmacies made a sufficient showing of irreparable harm to warrant an injunction, the
court said.

The court rejected defendant’s argument that plaintiffs’ harm was speculative, saying
defendant failed to refute “that many brand and generic drugs will be reimbursed at a
level below cost, thereby preventing pharmacies from providing those drugs and limiting
access for Medi-Cal patients.”

“Furthermore,” the court continued, “if pharmacists are forced to curtail services or go
out of business, there is no indication that all existing customers will have access to other
pharmacies in which to obtain their medication and, in some cases, home-delivery
services for such medication.”

In applying a balance of hardships analysis to its decision, the court explained that it is
“mindful of the difficulty facing the State of California in light of its fiscal crisis,” but found
“the significant threat to the health of Medi-Cal recipients,” was enough to tip the balance
in favor of granting an injunction.

Managed Pharmacy Care v. Jolly, No. CV 09-382 CAS (MANx) (C.D. Cal. Feb. 27, 2009).

California ER Physicians Sue State Alleging Medi-Cal
Reimbursement Rates Illegal
California emergency room physicians filed a lawsuit against the state arguing its
Medicaid program, Medi-Cal, is illegally reimbursing them at a rate far below the costs of
providing care.

According to the complaint, the state’s unreasonable reimbursement rates are
unconstitutional and also violate federal and state laws.

Plaintiffs Centinela Freeman Emergency Medical Associates, Valley Presbyterian
Emergency Medical Associates, Sutter Emergency Medical Associates, and Valley
Emergency Physicians Medical Group filed the class action complaint in Los Angeles
County Superior Court.

The complaint contends the “Medi-Cal reimbursement rate shifts the costs of providing
emergency medical services from the state to emergency room physicians,” who are
legally required to provide emergency care regardless of a patient’s ability to pay.

These mounting costs, the complaint says, have reached a tipping point where
emergency room physicians, particularly in rural and inner city areas, can no longer
absorb them.

“In 2007 alone, emergency room physicians lost over $100 million in services provided to
Medi-Cal patients,” according to the complaint.

California leads the nation in emergency department closures, with 85 hospitals and 55
emergency rooms shuttering their doors over the last decade, the complaint says.

The complaint alleges the “inappropriately low Medi-Cal reimbursement rates”
violates plaintiff physicians' equal protection rights and constitutes an unlawful taking of
property under federal and state constitutions.

Ninth Circuit Agrees To Stay Medi-Cal Rate Reductions For
The Ninth Circuit agreed April 6, 2009 to stay reductions in California’s Medi-Cal
reimbursement rates for hospitals pending its decision on appeal of a district court’s
refusal to grant the plaintiff hospitals a preliminary injunction blocking implementation of
the cuts.

Disagreeing with the district court, the appeals court found plaintiff hospitals had
demonstrated irreparable harm in the form of reductions in their Medi-Cal revenue
payments that could not be addressed in a subsequent action against the state because
of sovereign immunity under the Eleventh Amendment.

The case was brought by a coalition of providers, including the California Pharmacists
Association, the California Medical Association, the California Dental Association, the
California Hospital Association (CHA), and the California Association for Adult Day
Services, arguing the reductions in Medi-Cal payment rates under AB 1183 slated to go
into effect March 1, 2009 would “drastically impair payments” and “create[] significant
gaps in access” for the state’s most vulnerable populations.

The hospital plaintiffs, comprised of the CHA and some individual hospitals, moved for a
preliminary injunction to enjoin a reduction in the Medi-Cal fee-for-service rates to
hospitals, arguing AB 1183 was enacted in violation of 42 U.S.C. § 1396a(a)(30)(A),
which requires the state to consider efficiency, economy, quality of care, and access
before setting reimbursement rates. See Orthopaedic Hosp. v. Belshe, 103 F.3d 1491
(9th Cir. 1997).

The Ninth Circuit agreed with the district court’s finding that the hospital plaintiffs had
shown a likelihood of success on the merits because the state legislature did not consider
any of the factors under Orthopaedic before passing the rate cuts in AB 1183.

But unlike the district court, the appeals court concluded the hospital plaintiffs also had
shown irreparable harm.

According to the appeals court, “[a] cause of action based on the Supremacy Clause
obviates the need for reliance on third-party rights because the cause of action is one to
enforce the proper constitutional structural relationship between the state and federal
governments and therefore is not rights-based.”

Thus, the hospitals could assert the harm to themselves or their members to obtain
injunctive relief.

The appeals court also held plaintiffs’ monetary injury—i.e., the reduction in their Medi-
Cal revenues—was irreparable because the Eleventh Amendment would bar the hospitals
from recovering damages in federal court.

Finally, the court concluded the equities and the public interest weighed in favor of
granting the stay.

“[I]t is clear that it would not be equitable or in the public’s interest to allow the state to
continue to violate the requirements of federal law, especially when there are no
adequate remedies available to compensate the Hospital Plaintiffs for the irreparable
harm that would be caused by the continuing violation.”

The reimbursement cuts, enacted as part of the state’s 2008-2009 budget, call for a 5%
rate reduction for Medi-Cal fee-for-services benefits paid to certain hospitals,
intermediate care facilities, skilled nursing facilities, and adult day healthcare centers; a
5% rate reduction in payments to pharmacies; and a 1% rate reduction for all other
Medi-Cal fee-for-service benefits, including physician and dental care.

In an earlier lawsuit, California providers sought to block a 10% reduction in Medi-Cal
reimbursement rates under legislation enacted in February 2008 (AB 5). See Independent
Living Ctr. of Southern Cal. v. Shewry). A preliminary injunction granted in federal court
remains in effect in that case, which also is pending before the Ninth Circuit.

California Pharmacists Ass’n v. Maxwell-Jolly, No. 09-55365 (9th Cir. Apr. 6, 2009).

New Hampshire High Court Says Nursing Home Operator’s
Medicaid Provider Contract May Support Breach Of Contract Suit
A New Hampshire nursing home operator could bring a breach of contract action against
a state Medicaid agency based on the provider agreement, the state high court ruled
November 20, 2008.

The New Hampshire Supreme Court reversed a lower court’s decision holding the
provider agreement was not a contract and remanded for further proceedings.

In the mid-1990s, the nursing home operator, Bel Air Associates (Bel Air), was ordered
by the state Medicaid agency, the New Hampshire Department of Health and Human
Services (DHHS), to close, for safety reasons, one of the buildings in the nursing home it

Bel Air then received approval from the state to build a nursing home addition to replace
the closed building. Construction of the addition ultimately cost Bel Air approximately $2

At the time Bel Air undertook its new construction, the Medicaid rate-setting process
allowed nursing homes to recover most capital costs. In 2002, however, DHHS instituted
a new cap on capital cost recoveries based on a budget neutrality factor that limited
recoveries to 85% of allowable capital cost expenses.

In 2003, Bel Air sued DHHS, challenging the use of the budget neutrality factor and the
new cap.

Subsequently, in a 2006 decision, the state high court found the capital cost cap and the
budget neutrality factor to be rules adopted in violation of the New Hampshire
Administrative Procedure Act (NHAPA), and therefore not valid against Bel Air.

Bel Air then brought a second lawsuit against DHHS, alleging breach of contract based on
its Medicaid provider agreement with the agency and seeking to recover what it would
have been paid under the preexisting reimbursement rules.

DHHS moved for summary judgment, arguing Bel Air’s claims were barred by res
judicata, the statute of limitations, and the doctrine of sovereign immunity. In addition,
DHHS asserted that the Medicaid provider agreement at issue was not a contract, and if it
were found to be a contract, the agency had not breached it.

Bel Air countered that the provider agreement was a contract and DHHS breached its
implied terms by failing to adopt the capital cost cap and budget neutrality factor in
accordance with NHAPA.

A trial court granted summary judgment in favor of the state, ruling the Medicaid
provider agreement at issue could not provide the basis for a breach of contract claim
because the agreement was not a contract. The trial court reasoned that the agreement
was limited to establishing Bel Air’s eligibility to receive payment from DHHS and did not
establish an express contractual right to reimbursement.

In reversing that decision, the state high court agreed with Bel Air that the provider
agreement contained “all of the indicia of a contract,” i.e., offer, acceptance,
consideration and a meeting of the minds.

“We hold that it is reasonably clear that pursuant to the . . . provider agreement, Bel Air
and DHHS agreed that Bel Air would provide nursing home services to Medicaid-eligible
individuals in exchange for reimbursement by DHHS” as required under the then existing
provisions of Title XIX of the Social Security Act, which were “incorporated by reference
in the agreement,” the high court said.

Remanding the case for further proceedings, the high court did not address the state’s
argument that the trial court was correct in granting summary judgment in DHHS’ favor
on the grounds of res judicata or the expiration of the applicable statute of limitations.

“The trial court may consider these issues on remand,” the high court said.

Bel Air Assocs. v. New Hampshire Dep’t of Health and Human Servs., No. 2008-51 (N.H.
Nov. 20, 2008).

North Carolina Supreme Court Says State’s Framework For
Recovering Medical Expenses From Tort Settlements Consistent
With Federal Medicaid Law
North Carolina’s statutory framework for recovering medical expenses from a Medicaid
recipient’s tort settlement is consistent with federal law as interpreted by the U.S.
Supreme Court’s decision in Arkansas Dep’t of HHS v. Ahlborn, 547 U.S. 268 (2006), the
state’s highest court ruled December 12, 2008.

According to the high court, Ahlborn did not mandate a judicial determination of the
portion of a settlement from which the state could be reimbursed for prior medical

Instead, the Supreme Court left the door open for states to structure a reasonable
statutory framework governing Medicaid subrogation claims. Here, the North Carolina
legislature limited the state's Medicaid subrogation rights to one-third of the settlement
“thus prevent[ing] excessive depletion of a plaintiff’s recovery,” the state high court

Katelyn Andrews, who was injured during her birth, sued her doctors and the hospital
where she was delivered for medical malpractice.

Katelyn and her parents settled with defendants and a trustee was appointed for the
settlement account. Because Katelyn is a Medicaid recipient, North Carolina's Division of
Medical Assistance (DMA) moved for reimbursement from the settlement account of
monies it had paid for her care.

The trial court granted the motion and the trustee appealed. Citing Ahlborn, the trustee
argued the DMA was only entitled to the settlement funds that Katelyn received as
compensation for medical expenses.

In Ahlborn, the Court held a state’s ability to recover its Medicaid lien was limited to the
pro-rata portion of the settlement representing compensation for past medical expenses
only, not the entire settlement.

The appeals court in its decision noted the state supreme court addressed the issue in
Ezell v. N.C. Dep’t of Health & Human Servs., 631 S.E.2d 131 (2006), which held the
DMA was subrogated to the entire amount of the settlement, regardless of whether the
funds were for pain and suffering or medical expenses.

The appeals court said Ezell was controlling as it was decided after the Ahlborn case and
Ahlborn was interpreting an Arkansas statute, not one from North Carolina.

The North Carolina Supreme Court affirmed the rulings below.

According to the high court, the Ahlborn holding was limited by the parties’ stipulations
regarding the allocation of damages in the tort recovery and “did not require a specific
method for determining the portion of a settlement that represents the recovery of
medical expenses.”

In contrast to Arkansas, the state at issue in Ahlborn, “North Carolina employs an
alternative statutory procedure that we believe is permitted” under the Supreme Court

Specifically, North Carolina law defines “the portion of the settlement that represents
payment for medical expenses” as the lesser of the state’s past medical expenditures or
one-third of the plaintiff’s total recovery.

This one-third limitation, the high court reasoned, “comports with Ahlborn by providing a
reasonable method for determining the State’s medical reimbursements, which it is
required to seek in accordance with federal Medicaid law.”

A dissenting opinion argued Ahlborn was binding and under that case, the North Carolina
statutory framework, without further determination of how the settlement proceeds were
allocated among the different types of damages plaintiff alleged, would be contrary to
federal law.

Andrews v. Haygood, No. 57A07-02 (N.C. Dec. 12, 2008).

Fifth Circuit Holds Medicaid “Reasonable Promptness Provision”
Applies To Payment, Not Provision Of Services
The Fifth Circuit rejected a lawsuit arguing the Texas Medicaid program violated the
Medicaid Act and the Supremacy Clause because it failed to ensure recipients received
reasonably prompt medical services on par with the general population.

Affirming a lower court’s dismissal of the action, the appeals court held the “Reasonable
Promptness Provision,” 42 U.S.C. § 1396a(a)(8), applies only to payment for medical
services received, not the provision of actual medical services.

The action, brought pursuant to 42 U.S.C. § 1983 by Equal Access for El Paso Inc. on
behalf of Medicaid recipients and medical service providers, alleged the Texas Medicaid
program, as administered by the Texas Health and Human Services Commissioner,
“deprived Medicaid recipients of their right to ‘medical assistance' . . . with reasonable
promptness,” as guaranteed by Section 1396a(a)(8).

But the Fifth Circuit found unavailing Equal Access’ argument that Section 1396a(a)(8)
guarantees prompt medical care and services to Medicaid recipients.

Instead, the appeals court said, “medical assistance” is used throughout the Medicaid Act
to mean “payment” for various medical services.

The Fifth Circuit cited decisions by the Sixth, Seventh, and Tenth Circuits in support of its

Equal Access argued that construing “medical assistance” to refer to payments for
medical services would render the language of the statute nonsensical.

The Reasonable Promptness Provision states that “medical assistance . . . shall be
furnished with reasonable promptness to all eligible individuals.”

According to Equal Access “eligible individuals” can only refer to Medicaid recipients, not
medical providers; thus, the provision, under the appeals court’s reading, would
contemplate financial assistance being provided to Medicaid recipients. Texas law,
however, prohibits Medicaid beneficiaries from receiving payment for medical services
they obtain.

Rejecting this argument, the appeals court noted the Medicaid Act does permit individual
Medicaid recipients to receive payment for medical services, at the option of the state.

“Thus, notwithstanding Texas’s prohibition on direct payments to Medicaid beneficiaries,
construing 'medical assistance' to mean 'payments for financial services' does not give
the Medicaid Act a nonsensical meaning,” the appeals court reasoned.

The appeals court also rejected Equal Access’ argument that the Texas Medicaid program
violated the Supremacy Clause.

Equal Access for El Paso Inc. v. Hawkins, No. 08-50144 (5th Cir. Mar. 12, 2009).

Regulatory Developments
CMS Issues Final Rule Revising Definition Of “Multiple Source
Drug” In Medicaid Rule
The Centers for Medicare and Medicaid Services (CMS) issued October 7, 2008 a final rule
(73 Fed. Reg. 58491) revising the definition of “multiple source drug” for Medicaid
purposes to conform with statutory language and address concerns raised in a federal
lawsuit brought by the National Association of Chain Drug Stores (NACDS) and the
National Community Pharmacists Association (NCPA).

Under a July 2007 final Medicaid “drug rebate rule” (72 Fed. Reg. 39142), CMS defined a
“multiple source drug” as one sold or marketed in the United States, as opposed to the

The NACDS and NCPA lawsuit, which challenges several aspects of the final rule, raised
concerns that all drug products are not generally available in every state.

Accordingly, CMS said the revised definition indicates that a multiple source drug is one
that is sold or marketed in the “state” during the rebate period, in line with the relevant
statutory language.

In November 2007, NACDS and NCPA filed a lawsuit to block the drug rebate rule,
arguing its impact on Medicaid reimbursements of generic drugs would spell dire
consequences for community pharmacies.

According to the lawsuit, filed in the U.S. District Court for the District of Columbia, the
regulations, which were slated to go into effect in January 2008, would reduce
reimbursement rates below the level permitted by law.

The changes affect Medicaid payments to pharmacies for generic drugs and are expected
to save $8.4 billion in state and federal funds over five years, CMS has said.

On December 14, 2007, the district court judge in the case issued a preliminary junction
halting implementation of the rule until a final decision on the merits of the lawsuit.
National Ass’n of Chain Drug Stores v. Health and Human Servs., No. 1:07-cv-02017

CMS said the final rule, to the extent that it may affect Medicaid reimbursement rates for
retail pharmacies, is subject to the district court’s injunction.

NACDS and NCPA stressed that the revised definition does not address their two other
major concerns about the Medicaid drug rebate rule, which involves the calculation and
reporting of average manufacturer price (AMP) and best price and amends existing
regulations on the calculation of the federal upper payment limits (FULs) for certain
covered outpatient drugs.

In their lawsuit, the pharmacy groups have argued that the rule does not comply with the
Social Security Act’s definition of AMP and that the rule improperly applies FULs on
reimbursement to non-equivalent drug products.

The groups noted, while not a permanent solution, Congress this summer delayed
implementation of the drug rebate rule until October 2009.

“As we are hopeful for continued success in court, we will continue to encourage
Congress to work with pharmacy to find more appropriate models for pharmacy
reimbursement for generics under Medicaid,” they said.

Subsequently, on February 20, 2009, the U.S. District Court for the District of Columbia
issued an order delaying further proceedings challenging the ruling.

The pharmacy groups applauded the ruling, saying the delay was jointly requested by the
Department of Health and Human Services in light of the change in administration and
“given that the Centers for Medicare and Medicaid Services (CMS) must resolve any
regulatory issues related to yet another revised definition of ‘multiple source drug,’ and is
not prepared to proceed with the case at this time.”

The court agreed to postpone a scheduled February 25, 2009 hearing. The groups said no
major new developments are expected in the case until after May 15, 2009.

“This will be CMS’ fourth attempt to define ‘multiple source drug.' The prior attempt was
rendered invalid because, in reviewing CMS documents in preparation for the case,
NACDS and NCPA discovered that CMS failed to take into consideration an NACDS-NCPA
economic report when developing that definition,” the groups said in their statement.

CMS Issues Final DSH Auditing And Reporting Rule
The Centers for Medicare and Medicaid Services (CMS) issued a final rule in the
December 19, 2008 Federal Register (73 Fed. Reg. 77903) establishing new auditing and
reporting requirements for Disproportionate Share Hospital (DSH) payments, which are
intended to bring transparency to the use of DSH funds.

The final rule implements Section 1001(d) of the Medicare Prescription Drug,
Improvement, and Modernization Act, under which states were required, beginning in
fiscal year 2004, to submit a report to CMS identifying each DSH payment and any

payment adjustments made to hospitals during the preceding fiscal year. States also
were required to conduct independent audits to certify the extent to which hospitals have
reduced the net uncompensated care costs they are claiming to reflect the DSH payments

The proposed rule, published in the August 26 Federal Register (70 Fed. Reg. 50262),
would have required each state receiving a DSH allotment to report the name of the
hospital, Medicare and Medicaid provider numbers, type of hospital, type of hospital
ownership, Medicaid inpatient and low-income utilization rate, DSH payments, regular
Medicaid rate payments, and Medicaid Managed Care Organization payments, among
other information.

The final rule removes the following reporting requirements: Medicare provider number;
Medicaid provider number; type of hospital; type of hospital ownership; transfers;
Medicaid eligible and uninsured individuals. The final rule also adds or clarifies several
data elements "which are necessary to fulfill the auditing and reporting requirements."

In addition, the final rule includes a transition period related to audit findings for Medicaid
state plan rate year 2005 through 2010 in response to "many comments regarding the
potential immediate adverse fiscal impact of the DSH audit on States."

The rule is effective January 19, 2009.

Federal Government Approves Rhode Island Medicaid Waiver
The federal government has given its stamp of approval to a controversial five-year
demonstration that would provide Rhode Island unprecedented flexibility in structuring its
Medicaid program, the state’s Governor Donald L. Carcieri announced December 19,

As part of the deal, Rhode Island has agreed to limit its allotment of Medicaid funds from
the federal government to $12.1 billion over the span of the demonstration.

The demonstration, called the “Rhode Island Global Compact Waiver,” will allow the state
to redesign its Medicaid program “to provide cost-effective services that better meet the
changing needs of the individuals it serves,” according to the Governor’s press release.

“This agreement will put us on a sustainable path for growth in Medicaid while also
maintaining services for those most in need,” Carcieri said.

The major features of the waiver call for reforming the way long term care is provided
and implementing a prevention-based care system for all beneficiaries.

The reforms under the compact are expected to save $358 million over the five-year
period from 2009 through 2013.

Under the waiver, the state will have added flexibility to bypass federal regulations
regarding service design and delivery.

Critics of the agreement are concerned the waiver could mean a cutback on services and
limit beneficiary protections.

Administration Delays CMS Rules Giving States More Flexibility
In Medicaid Program Design
The Obama Administration announced the delay of two rules issued by the Centers for
Medicare and Medicaid Services (CMS) at the tail-end of last year aimed at giving states
more flexibility in designing their Medicaid benefit packages.

In a January 27, 2009 Federal Register notice (74 Fed. Reg. 4888), CMS announced a 60-
day delay in the effective date of a final rule issued on November 25, 2008 that would
have allowed states to impose premium and cost-sharing requirements on certain
Medicaid recipients.

The new effective date of the final rule is now March 27, 2009.

According to the notice, the delay is necessary so agency officials can further review and
consider new regulations.

CMS also is requesting additional public comments on the rule by February 26, 2009.

In a February 2 Federal Register notice (74 Fed. Reg. 5808), CMS also delayed for 60
days a related regulation issued December 3, 2008 that would allow states to offer
certain Medicaid recipients healthcare that has the same value as plans that are being
offered to other populations in the state through alternative benefit packages called
“benchmark plans.”

The new effective date of that final rule is April 3, 2009.

Both rules implemented provisions of the Deficit Reduction Act of 2005.

CMS subsequently decided to further delay the rules until December 31, 2009.


States’ Bleak Fiscal Outlook Means Deep Cuts To Safety Net
Programs, Report Says
With at least 43 states projecting budget shortfalls for 2009 or 2010, many states have
cut or are planning cuts to Medicaid and the State Children’s Health Insurance Program,
according to a report released December 11 by consumer group Families USA.

According to the report, A Painful Recession: States Cut Health Safety Net Programs,
more than one million people could lose health coverage and many more will see benefits
reduced and out-of-pocket costs go up in the coming months.

Families USA reported that eight states have enacted or are considering cuts to reduce
eligibility or limit enrollment in Medicaid; 12 states and the District of Columbia have
enacted or are considering reducing Medicaid benefits; five states have enacted or are
considering increasing Medicaid recipient’s out-of-pocket costs; and 13 states and the
District of Columbia have reduced or are considering reductions in payments to Medicaid

The report urged that financial help for states in a federal economic recovery package
would help them preserve the Medicaid and SCHIP healthcare safety net.

“During economic downturns, the health care safety net is supposed to provide protection
for families so they don’t lose needed health coverage,” said Ron Pollack, Executive
Director of Families USA. “Unfortunately, for too many people in too many states, the
health care safety net is fraying and allowing more and more families to fall through.”

Stimulus Bill Bumps Federal Matching Rate For State Medicaid
To help state Medicaid programs weather the economic downturn, Congress enacted as
part of stimulus legislation, the American Recovery and Reinvestment Act (ARRA), an
across-the-board 6.2 percentage point bump in the federal medical assistance percentage
(FMAP). States also are eligible for an additional increase based on their unemployment

The Department of Health and Human Services (HHS) published a notice in the April 21,
2009 Federal Register (74 Fed. Reg. 18235) setting forth the revised FMAPs)for the first
two quarters of Fiscal Year (FY) 2009 pursuant to ARRA.

ARRA set aside $87 billion in federal funds for state Medicaid programs through increases
in FMAP.

The recession adjustment period as defined in the statute is from October 1, 2008
through December 31, 2010. The notice sets forth the revised FMAPs HHS will use to
calculate the amount of federal matching for state Medicaid programs from October 1,
2008 through March 31, 2009.

Medical Malpractice
Georgia High Court Finds Negligent Misdiagnosis Lawsuit Not
Time-Barred Under “New Injury” Exception
The Georgia Supreme Court ruled June 2, 2008 that the “new injury” exception to the
two-year statute of limitations applied to a plaintiff’s claim that his metastatic colon
cancer resulted from his physician’s misdiagnosis of rectal bleeding as hemorrhoids rather
than pre-malignant polyps.

The high court affirmed the determinations below that the statute of limitations had not
yet run on the plaintiff's claim, even though more than four years had elapsed since the
alleged misdiagnosed of his medical condition.

In January 2000, plaintiff Wilbert Barnes visited his physician, Dr. Chuckwudi Bato Amu,
and complained of rectal bleeding. Amu diagnosed a hemorrhoid condition and prescribed
medication. Within two weeks, the bleeding stopped, and Barnes never returned to Amu
for any other treatment.

In 2002, Barnes began to see another physician, Dr. Bruce Ramsdell as his primary care
physician. Although Barnes had several appointments with Ramsdell over the next year,
none of these appointment revealed any colon problems.

In Spring 2004, Barnes suffered a reoccurrence of rectal bleedings, as well as abdominal
cramping and severe nausea. He consulted Ramsdell in June 2004, who referred him to a
gastroenterologist after blood work showed some abnormalities. The gastroenterologist

performed a colonscopy that revealed a large tumor in Barnes’s colon. The tumor was
later found to be metastatic, with spread to the lymph nodes and liver.

In December 2004, Barnes sued Amu and his employer, Atlanta Medical Care, PC
(collectively, defendants), for medical malpractice, alleging a claim for negligent
misdiagnosis. According to the complaint, Amu should have performed a more thorough
exam to rule out the possibility that colon polyps were the cause of Barnes’s rectal

Defendants raised the two-year statute of limitations under Ga. Code Ann. § 9-3-71(a) as
an affirmative defense. In addition, at trial, defendants filed a motion in limine,
contending the statute of limitations began to run from the date of the alleged
misdiagnosis in January 2000, and therefore, had expired prior to the initiation of the

In denying that motion, the trial court disagreed that the statute of limitations
commenced on the date of the alleged misdiagnosis, instead holding the statute of
limitations commenced when the symptoms of metastatic colon cancer first manifested
themselves to Barnes in 2004.

The appeals court affirmed, agreeing that the case fell within the “new injury” exception.
Under that exception, the appeals court explained, when a misdiagnosis results in
subsequent injury that is difficult or impossible to date precisely, the statute of limitation
runs from the date symptoms attributable to the new injury are manifest to the plaintiff.
Barnes appealed.

While the “new injury” exception applies only “in the most extreme circumstances,” the
state high court also agreed that this case fell within the exception.

Under Georgia appellate court precedent, for the “new injury” exception to apply, “not
only must there be evidence that the [patient] developed a new injury, but [he or she]
also must remain asymptomatic for a period of time following the misdiagnosis,” the high
court said.

Quoting from one appellate court decision, Whitaker v. Zirkle, 374 S.E.2d 106 (Ga. Ct.
App. 1988), the high court also noted that “‘a patient suffers a ‘new injury’ if he or she
has a relatively benign and treatable precursor medical condition which, as a proximate
result of being misdiagnosed, is left untreated and subsequently develops into a much
more serious and debilitating condition.’”

“The evidence here shows that Mr. Barnes did experience such a ‘new injury,’” the high
court continued, “when, as a consequence of the misdiagnosis, he did not seek treatment
for the pre-malignant polyp or very early malignancy from which he suffered in January
2000 and subsequently developed metastatic colon cancer which spread to his lymph
nodes and liver.”

Moreover, “the evidence . . . shows that, after being misdiagnosed, . . . Barnes was
asymptomatic as to the medical complaints which led him to visit Dr. Amu,” the high
court said.

Therefore, in this case, “the trigger for the commencement of the statute of limitations is
the date that the ‘new injury,’ which is determined to be an occurrence of symptoms
following an asymptomatic period,” the high court explained.

“Barnes experienced the symptoms of his ‘new injury’ in June 2004,” the high court said,
and the “two-year statute of limitations began to run at that time, even though he did not
discover until some time later that his metastatic colon cancer was attributable to Dr.
Amu’s misdiagnosis.”

Amu v. Barnes, No. S07G1818 (Ga. June 2, 2008).

Michigan Supreme Court Says Pharmacy Cannot Be Liable For
Medical Malpractice, Finds Statute Of Limitations For Ordinary
Negligence Applies
The Michigan Supreme Court found June11, 2008 that an action against a pharmacy and
one of its non-pharmacist employees concerning the filling of a prescription was one for
ordinary negligence and therefore was not time-barred under the shorter, two-year
statute of limitations applicable to medical malpractice.

Affirming the lower courts’ denial of summary judgment on statute of limitations grounds,
the high court held a pharmacy is not a licensed health facility or agency nor a licensed
healthcare professional and therefore cannot be directly liable for medical malpractice.

The case arose after non-pharmacist Valerie Randall refilled Judith Kuznar’s prescription
for Mirapex, used to treat restless leg syndrome, at eight times the prescribed dose.
Randall was an employee of Crown Pharmacy and was not acting under the supervision of
a pharmacist, according to the opinion.

Judith had an adverse reaction to the excessive dose and, along with her husband Joseph
Kuznar, sued Randall and Crown Pharmacy (collectively, defendants) for negligence. The
Kuznars also asserted a claim of vicarious liability against Crown Pharmacy.

Among other claims, the Kuznars alleged Crown Pharmacy breached its duty to them by
allowing persons other than a licensed pharmacist to refill prescriptions and failing to
have a licensed pharmacist available onsite as required by statute.

Defendants moved for summary judgment, arguing Randall was employed at a licensed
health facility and therefore the action was time-barred under the two-year statute of
limitations for medical malpractice.

The trial court denied the motion and the appeals court affirmed.

Also affirming, the Michigan Supreme Court held a pharmacy technician and pharmacy
are not covered by the state’s medical malpractice statute, Mich. Comp. Laws.

Specifically, the high court noted that a “licensed health facility or agency,” the term used
in the medical malpractice statute, is defined in a different article of the public health
code than the article applicable to pharmacy licensing. Thus, a pharmacy is not a
“licensed health facility or agency” subject to medical malpractice claims.

The high court also declined to hold that a pharmacy is a licensed healthcare

State standards make clear that a license to operate a pharmacy can be issued to a non-
pharmacist, although a pharmacy cannot open for business without a licensed pharmacist
physically onsite.

“Because a pharmacy may be operated by a nonpharmacist, a pharmacy and a
pharmacist are not the same thing. Whereas a pharmacist is a licensed health care
professional, a pharmacy is not,” the high court reasoned.

Crown Pharmacy itself is not a licensed healthcare professional; thus, its direct liability
for statutory violations lies in ordinary negligence and is subject to the three-year statute
of limitations.

Randall likewise is not a licensed pharmacist and therefore cannot be liable in medical
malpractice, rather she can be liable for ordinary negligence and Crown Pharmacy can be
vicariously liable for the ordinary negligence of its employee.

Kuznar v. Raksha Corp., No. 132203 (Mich. June 11, 2008).

Massachusetts High Court Declines To Apply Ruling Recognizing
Same-Sex Marriages Retroactively In Loss Of Consortium Case
The Massachusetts Supreme Judicial Court denied July 10, 2008 recovery to a same-sex
couple seeking loss of consortium when the alleged injury occurred prior to the court's
ruling granting same-sex couples the right to marry. See Goodridge v. Department of
Health, 798 N.E.2d 941 (Mass. 2003).

Plaintiffs Cynthia Kalish and Michelle Charron started dating in March 1990. Although they
jointly purchased a house, adopted a child, shared all household expenses, were on the
same family health insurance policy, and executed documents granting each other certain
legal authority, they were not legally married.

Following the Goodridge decision, Kalish and Charron were married on May 20, 2004.
Prior to their marriage, in July 2003, Charron was diagnosed with breast cancer. On May
21, 2004, in connection with a medical malpractice action, Kalish commenced a civil
action for loss of consortium.

Defendants in the medical malpractice action moved for a partial summary judgment on
Kalish's loss of consortium claim, arguing the couple was not married at the time of the
alleged injury. A Massachusetts Superior Court judge granted defendants summary

On its own initiative, the high court transferred the case from the appeals court and
affirmed the grant of summary judgment to defendants.

The high court noted that under established case law an individual seeking loss of
consortium must have a legal relationship with the injured party, and for an adult couple
this relationship is established through marriage.

In Goodridge, the high court found the state's marriage licensing statute unconstitutional
because it limited the many "protections, benefits, and obligations" that flow from civil
marriage, including the right to claim loss of consortium, to opposite sex couples.

Kalish argued that because the licensing statute violated the Massachusetts Constitution,
all the laws that required opposite-sex marriage were likewise unconstitutional.

But the high court rejected this argument. "As Goodridge recognized, where a change in
law is so radical that the consequences of that change realistically require time for the
Legislature to act, a court may make the remedy for unconstitutional laws prospective

According to the court, Goodridge allowed same-sex couples the right to obtain marriage
licenses after May 17, 2004, but it did not stand for the proposition that same-sex
committed relationships would be considered married prior to that date.

The high court also was concerned that allowing Kalish to recover for loss of consortium
on proof she would have been married but for the ban on same-sex marriage could open
the door to countless more cases.

Charron v. Amaral, No. SJC-09942, (Mass. July 10, 2008).

Texas Supreme Court Finds Hospital That Outsourced
Echocardiogram Services Without Guaranteed Response Time Was
Grossly Negligent
A divided Texas Supreme Court affirmed August 29, 2008 a jury verdict finding a hospital
grossly negligent in a medical malpractice action following the death of a patient whose
echocardiogram (echo) was not competed until three hours after his physician ordered it

One of the key factors the high court relied on in reaching its decision was that the
hospital had outsourced the performance of echo services to a third-party vendor but
declined to exercise an option to guarantee an expedited response time, despite apparent
knowledge that this could be critical.

Bob Hogue was sent to the emergency room (ER) of Columbia Medical Center of Las
Colinas (Columbia Medical) in severe respiratory distress and with a preliminary diagnosis
of pneumonia. Hogue did not tell ER physicians that he was previously diagnosed with a
heart murmur.

While Hogue was experiencing some signs of cardiac distress, an electrocardiogram and
blood tests came back negative. Hogue’s condition continued to falter and he was
transferred to the hospital’s intensive care unit (ICU).

After conferring with a cardiologist, the physician treating Hogue ordered an echo of his
heart “now,” which the physician testified was equivalent to “stat.” The echo was not
completed, however, until three hours after it was ordered.

During the echo, a technician immediately identified a severe leakage of Hogue’s mitral
valve. Hogue was transferred to another hospital for emergency surgery to repair the
valve but died before the procedure could take place.

Hogue’s wife and two sons (plaintiffs) sued Columbia Medical. A jury found the hospital
grossly negligent, awarding over $9 million in actual damages and $21 million in punitive
damages. The jury also found Hogue was not contributorily negligent for failing to tell
treating physicians about his heart murmur.

The actual and punitive damages awards were reduced to roughly $1.47 million and
$3.36 million under applicable state law damages caps.

On the issue of Hogue’s contributory negligence, the high court found no evidence that
the hospital would have done anything differently if it had known of his heart murmur,
citing the testimony of the treating physicians who said the information would not have
changed their course of treatment.

The high court also affirmed the jury’s finding that Columbia Medical’s conduct deviated
so far from the standard of care as to create an extreme risk and the hospital was
subjectively aware of, but consciously indifferent to, this risk.

The high court based its conclusion on the evidence that the hospital elected to outsource
the echo services without a guaranteed response time while providing emergency
services, failed to communicate this limitation to its medical staff so they could consider
other options to treat critical patients, and delayed obtaining the echo despite the serious
risk to Hogue’s health.

The high court also noted testimony that the standard of care for stat echo response time
is roughly 30 minutes and that Hogue would have had a 90% chance of survival if he had
been diagnosed sooner.

“We do not hold that Texas law requires all hospitals to provide all services to all
patients,” the high court stressed. In this case, the high court continued, the hospital
knew of the obvious necessity for potentially life-saving stat echo capabilities in
connection with emergency medical services it decided to provide, but did not act

The high court did reverse a separate award of inheritance damages to plaintiffs, finding
they failed to present sufficient evidence that Mrs. Hogue would have outlived her
husband or as to Mr. Hogue’s life expectancy had he survived.

A dissenting opinion disagreed with the majority’s conclusion about gross negligence. A
finding of gross negligence requires clear and convincing evidence and also requires a
higher level of review, the dissent noted.

According to the dissent, although the majority articulated the correct standard, it failed
to apply it in evaluating the evidence.

Columbia Med. Ctr. of Las Colinas, Inc. v. Hogue, No. 04-575 (Tex. Aug. 29, 2008).

Seventh Circuit Finds Malpractice Insurance Carrier Owes No
Duty To Third-Party To Settle Lawsuit
The Seventh Circuit held October 31, 2008 that a medical malpractice insurer only owes a
duty to settle a lawsuit in good faith to its insured (a physician in this case) and not to
the hospital policyholder.

Iowa Physicians’ Clinic Medical Foundation d/b/a Iowa Health Physicians (IHP) runs a
medical clinic where Dr. Randall Mullin works as a family doctor.

While working at the clinic, Mullin treated Dennis Goetz, who needed antimalarial therapy
in anticipation of his trip to Africa.

However, the treatment apparently did not work as Goetz contracted malaria during his
trip. Mullin then failed to timely diagnose Goetz’s condition upon his return.

Goetz eventually died, and his wife sued Mullin for his negligent care and IHP on a theory
of vicarious liability.

Mullin had a medical malpractice insurance policy issued by the Physicians Insurance
Company of Wisconsin (PIC), which covered his liability up to $1 million and provided for
the defense of claims made against him.

IHP, though it paid insurance premiums on behalf of Mullin, was not covered under the
policy. Accordingly, IHP retained its own attorney in the lawsuit.

Because the facts of the case were not in their favor, both IHP and Mullin urged PIC to
settle the case.

PIC did not, however, settle the case and instead proceeded to trial where a jury awarded
$3.5 million in damages.

IHP and Mullin then sued PIC in state court claiming that PIC breached a duty owed to
both of them to settle the claim in good faith.

PIC removed the case to federal court and filed a motion for judgment on the pleadings.
The judge found that PIC had no duty to IHP but held that Mullin’s claim could proceed.
IHP appealed.

While acknowledging that an insurer has a duty to settle in good faith on behalf of its
insured, the appeals court refused to find that PIC owed IHP, the noninsured policyholder,
a duty to settle in good faith.

Because the Illinois courts have yet to decide the question presented in the appeal, the
appeals court noted that it was tasked with predicting “whether the Illinois high court
would stretch the duty to settle to cover the case before us.”

The appeals court found that IHP’s reliance on its contractual relationship with PIC as a
policyholder and customer was misplaced.

“The duty to settle is designed to protect the bargain embodied in an insurance contract,
not simply honor the relationship between contracting parties in general,” the appeals
court found.

In support of its finding, the appeals court noted IHP could have paid higher premiums to
receive coverage from PIC but chose not to.

“We doubt that the Illinois high court would extend the duty to settle to give IHP more
than it bargained for,” the appeals court said.

The appeals court also noted that IHP could have settled on its own. “If IHP is bristling
because it’s on the hook for wrongs it didn’t commit, then its complaint is really against
Dr. Mullin, not PIC, and it could, depending on the exact nature of their relationship,
possibly pursue contribution or indemnification from Dr. Mullin to mitigate its injury.”

Iowa Physicians’ Clinic Med. Found. v. Physicians Ins. Co. of Wis., No. 08-1297 (7th Cir.
Oct. 31, 2008).

Virginia Supreme Court Holds Parents Not Entitled To Recover
For Wrongful Birth
The Virginia Supreme Court reversed October 31, 2008 a judgment in favor of a mother
in a wrongful birth action against her obstetricians. The appeals court found the evidence

was insufficient as a matter of law to prove to a reasonable degree of medical probability
that had she undergone certain prenatal testing known as chorionic villus sampling
(CVS), the result would have been positive for Down syndrome.

The high court also affirmed a ruling that the father could not mount a separate claim for
wrongful birth because he did not have a physician-patient relationship with the
obstetricians nor did they engage in an affirmative act amounting to the rendering of

Julie Granata and Joseph Granata, the parents of twin daughters afflicted with Down
syndrome, brought separate claims against Jan Paul Fruiterman, M.D., Eleni Solos-
Kountouris, M.D., and their professional corporation (collectively, defendants) for
wrongful birth.

According to the Granatas, defendants breached the standard of care by failing to provide
Julie with information about first trimester testing known as CVS, which they said would
have revealed their twin fetuses were afflicted with Down syndrome.

In separate verdicts, the jury found in favor of Julie and awarded damages of $4 million.
The jury also found in favor of Joseph and awarded $500,000 in damages.

The court reduced the damages award to Julie to $1.6 million per the statutory cap. The
court also granted defendants’ motion to strike and dismiss Joseph’s case, concluding he
was not a patient as defined by state law.

On appeal, the Virginia Supreme Court reversed the lower court’s ruling as to Julie, and
affirmed as to Joseph.

According to the high court, Julie failed to prove to a reasonable degree of medical
probability that, if she had undergone CVS, the result would have shown the
chromosomal abnormality indicative of Down syndrome.

“None of Julie’s medical expert witnesses opined about what the result of CVS would have
been if Julie had undergone the procedure. Moreover, the Granatas acknowledged before
the circuit court that no such evidence existed in the record,” the high court said.

The high court also refused to draw the inference that the test would have been positive
had she undergone CVS because her daughters unquestionably have Down syndrome.

The high court noted that whether the result of CVS would have been positive for Down
syndrome was a matter requiring expert testimony.

The high court went on to affirm the ruling that Joseph could not bring a separate claim
because no physician-patient relationship existed between him and defendants.

The high court said the existence of a physician-patient relationship is a question of fact
and focused on a specific visit where Joseph accompanied Julie to defendants.

The high court examined the statutory definition of “patient” and concluded that during
the visit in question Joseph did not qualify as such. The appeals court noted that Joseph
was excluded from the initial portion of Julie’s appointment when defendants examined
her and was only invited into the room to discuss a genetic questionnaire.

Moreover, as Julie was the only one who could consent to and undergo CVS, information
about the test was not an “act . . . which should have been . . . furnished” to Joseph per
the state law definition.

The high court concluded that, in the context of pregnancy, a husband may be entitled to
receive such information about a fetus’ risk of having genetic abnormalities, but in this
case, the facts did not support a finding of a physician-patient relationship.

Finally, the high court rejected Joseph’s argument that defendants affirmatively
undertook to provide him healthcare, again finding the evidence insufficient as a matter
of law. The high court saw no affirmative act by defendants during the appointment at
issue that would amount to the rendering of healthcare to Joseph.

Fruiterman v. Granata, Nos. 071894 and 071897 (Va. Oct. 31, 2008).

West Virginia High Court Adopts Continuous Treatment Doctrine
In Certain Malpractice Cases
The continuous treatment doctrine should be adopted in certain medical malpractice
cases where the date of injury is not identifiable due to the nature of the medical
treatment received, the West Virginia Supreme Court of Appeals ruled November 19,

Under the doctrine, as articulated by the high court, when a patient is injured due to
negligence that occurred during a continuous course of medical treatment, and due to the
continuous nature of the treatment is unable to ascertain the precise date of injury, the
statute of limitation for purposes of medical malpractice statutes will begin to run on the
last date of treatment.

The underlying facts in the case involved malpractice claims brought against Dr.
Theodore Jackson, a hand surgeon who performed carpal tunnel surgery on plaintiff Paul
Forshey’s left hand in July 1995.

After the surgery, Forshey complained during post-operative visits that he was
experiencing continuing pain in his left hand. However, during each of multiple office
visits that occurred until January 1997, Jackson did not order any x-rays to further
explore the cause of the continuing pain.

At the end of January, Jackson recommended exploratory surgery, but the planned
surgery was subsequently cancelled at Forshey’s request. Forshey then discontinued his
office visits with Jackson.

It was not until eight years later, in the summer of 2005, that Forshey suffered an
unrelated injury to a finger on his left hand and, as a result, received an x-ray that
revealed a piece of a knife blade at the site of the carpel tunnel surgery. Forshey
indicated that, over this eight-year period, he continued to endure severe pain in his left

In April 2006, nearly 11 years after the carpal tunnel surgery, Forshey and his wife
(plaintiffs) sued Jackson for medical malpractice.

Jackson moved to dismiss based on the statute of limitations requiring lawsuits asserting
medical malpractice to be commenced within two years of the date of injury, or within
two years of the date when the injury was or should have been discovered, and in no
event more than 10 years after the date of the injury.

After a state trial court granted Jackson’s motion and dismissed the case, plaintiffs
appealed. Among other arguments, plaintiffs urged the high court to adopt the
continuous medical treatment doctrine and to apply that doctrine to find their cause of
action accrued on January 31, 1997 (the day Forshey terminated his treatment under
Jackson), and therefore was timely filed in August 2006.

The high court concluded the continuous treatment doctrine should be applied to extend,
under West Virginia law, the time allowed for filing a malpractice action when the date of
injury was not clearly identifiable due to the continuous nature of the treatment

The high court explained that, under the continuous treatment doctrine, the statute of
limitations “does not commence running until treatment by the physician or surgeon has
terminated, where the treatment is continuing and of such nature as to charge the
physician or surgeon with the duty of continuing care and treatment which is essential to
recovery until the relationship ceases,” i.e., the last date of treatment.

The high court also found, however, that the doctrine was not applicable to plaintiffs’

“Mr. Forshey’s injury did not result from a continuing course of treatment that rendered
him unable to identify the precise date of his injury,” the high court said. “Rather, the
alleged negligence in the instant case occurred on a date certain, the date that Dr.
Jackson performed surgery on Mr. Forshey’s hand and allegedly left a scalpel blade in his

The high court therefore affirmed the lower court’s decision granting Jackson’s motion to
dismiss the case as untimely.

“Because Mr. Forshey’s claim arose on July 6, 1995, the date on which Dr. Jackson
performed the carpal tunnel surgery, the circuit court was correct in concluding that,
pursuant to . . . W. Va. Code § 55-7B-4, ‘the absolute latest date that this action could
have been filed would have been on July 6, 2005, which is [10] years after the date of
the . . . alleged injury,” the high court said.

The high court also rejected the plaintiffs’ claim that their action was timely because the
additional visits Forshey had with Jackson in 1996 and 1997, wherein Jackson failed to
order an x-ray of Forshey’s hand, amounted to a continuing tort.

Plaintiffs’ complaint did not set out a cause of action for continuing tort therefore the
circuit court did not err in failing to consider this theory prior to dismissing the case, the
appeals court said.

Forshey v. Jackson, No. 33834 (W. Va. Nov. 19, 2008).

Maine High Court Rejects Continuing Course Of Treatment
The Maine Supreme Judicial Court refused December 9, 2008 to adopt the continuous
course of treatment doctrine, saying to do so would conflict with the statute of limitations
enacted by the legislature.

Maetta Dickey was a regular patient of Gerald E. Vermette, D.D.S. In March 2000, a
dental hygienist noticed a spot on an x-ray of Dickey’s teeth but did not express any
serious concerns.

At subsequent routine appointments, the hygienist showed the spot to Dr. Robert E.
Clukey, Jr., D.D.S., who said they should “keep an eye on it.” In March 2005, a second x-
ray showed the spot in Dickey’s mouth had grown. Vermette, at this time, reviewed the
two x-rays and referred Dickey to an oral surgeon who diagnosed her with oral cancer.

Following extensive surgery to remove the tumor and reconstruct her jaw, Dickey and
her husband (plaintiffs) sued Vermette on February 23, 2006, alleging medical or
professional negligence and loss of consortium.

Vermette sought partial summary judgment, arguing any claims based on acts or
omissions before February 23, 2003 were time barred under the applicable three-year
statute of limitations. See Me. Rev. State. § 2902.

Plaintiffs argued the court should apply the continuing course of treatment doctrine to toll
the statute of limitations until after Dickey’s relationship with Vermette ended in 2005.

The trial court refused, saying the continuing course of treatment doctrine was
inconsistent with Section 2902. The court did note that plaintiffs could still bring claims
for acts or omissions that occurred after February 23, 2003. But in order to immediately
appeal, the Dickeys stipulated that no act or omission occurring after February 23, 2003
was a proximate cause of their injuries.

The high court in a 5-2 ruling affirmed the trial court’s decision, agreeing that the
continuing course of treatment doctrine was inconsistent with Section 2902.

According to the high court, the legislature by declaring in Section 2902 that a cause of
action “accrues on the date of the act or omission giving rise to the injury” and carving
out a specific exception for foreign objects “effectively declined to adopt the continuing
course of treatment doctrine.”

To allow the Dickeys to bring their claim for acts or omissions occurring before February
23, 2003 “would be imposing a judicially-created exception that is contrary to the plain
meaning of section 2902,” the high court said.

The high court also declined to address the Maine Trial Lawyers Association’s argument in
an amicus brief to adopt the distinguishable “continuing negligent treatment” doctrine,
which provides that the limitations period begins to run on the last act of negligence, as
long as that act occurred within three years before the legal action was initiated.

Here, plaintiffs stipulated that no act or omission occurring after February 23, 2003 was a
proximate cause of their injuries; therefore, any discussion of this doctrine would be
irrelevant and premature, the high court said.

One dissenting opinion argued the majority’s conclusion sent a “don’t warn, don’t treat”
message “that is contrary to good law, good medicine, and good common sense.”

Another dissenting opinion said the majority should have reached the issue concerning
the application of the continuing negligent treatment doctrine. In the dissent’s view,
Section 2902 would not preclude the court from adopting the continuing negligent
treatment doctrine since the accrual date would not be not extended beyond the final
date on which negligent treatment occurs.

Dickey v. Vermette, No. Som-08-143 (Me. Dec. 9, 2008).

Pennsylvania Supreme Court Finds Jury Must Decide Whether
Medical Malpractice Case Was Time-Barred, But Rejects Broader
Interpretation Of Discovery Rule
The Pennsylvania Supreme Court reversed February 19, 2009 the grant of summary
judgment in favor of a physician who alleged the medical malpractice action against him
was time-barred under the two-year statute of limitations.

The high court found the question of when the plaintiff had actual or constructive
knowledge of her injury or its cause to toll the statute of limitations pursuant to the
discovery rule was one that should be left to the jury.

At the same time, the high court declined to adopt a more expansive reading of the
discovery rule to find the action timely as a matter of law, the conclusion urged by the
dissent. Specifically, the high court rejected any requirement of a definitive diagnosis to
trigger the start of the limitations period.

Plaintiff Mary Elizabeth Wilson filed the medical malpractice action in October 2003
against defendants Samir El-Daief, M.D. and Montgomery Hospital Medical Center,
alleging El-Daief lacerated the radial nerve in her wrist during a surgical procedure
performed in August 2000.

Defendants sought summary judgment based on the two-year statute of limitations.

Plaintiff argued the discovery rule tolled the statute of limitations until October 2001
when she learned from another physician about her injury. According to plaintiff, prior to
that time, she had sought treatment with El-Daief and another orthopedic surgeon for
some 13 months, but neither of them could pinpoint the cause of her pain and other

The trial court granted defendants summary judgment, noting plaintiff had experienced
constant, excruciating pain shortly after the August 2000 surgery, her hand had
contracted into a fist, her right elbow bent inward, and her right shoulder drew upward.

According to the court, these symptoms, which plaintiff had not experienced following a
similar May 2000 surgery, coupled with her acknowledgment in September 2001 that she
believed “something was wrong” and had lost confidence in El-Daief, started the clock
running on her medical malpractice action.

A divided Pennsylvania appeals court affirmed, rejecting the suggestion that a definitive
diagnosis was necessary to trigger the running of the limitations period since under Pa. R.
Civ. P. 1042.3(a) a plaintiff in a professional liability action must file a certificate of merit
(COM) simultaneously with her complaint or 60 days thereafter.

The high court reversed the grant of summary judgment in defendants’ favor, saying a
question of fact existed on the discovery rule issue given “evidence of potential sources of
confusion, in the asserted unwillingness or inability on the part of Dr. El-Daief to
recognize injury or cause.”

At the same time, the high court went on to emphasize that Pennsylvania’s formulation of
the discovery rule was a narrower approach than some other jurisdictions.

“While we reiterate that knowledge of ‘injury’ and ‘cause’ does not require a precise
medical diagnosis, we decline to hold as a matter of law, that a lay person must be

charged with knowledge greater than that which was communicated to her by multiple
medical professionals involved in her treatment and diagnosis,” the high court said.

Finally, the high court refused to “retool” the discovery rule in light of the procedural COM
requirement in Rule 1042.3. The majority argued that the current discovery rule was
adequate to ensure injured plaintiffs had their day in court, while at the same time
protecting defendants from stale claims.

A dissenting/concurring opinion said the majority should have found plaintiff’s action
timely as a matter of law.

According to the dissent, the COM requirement coupled with the narrow interpretation of
the discovery rule placed plaintiffs “in the precarious position of being constrained to file
a lawsuit before they know whether their resulting symptoms are linked to a physician’s

Plaintiffs must supply a timely COM from a licensed professional indicating a defendant’s
conduct caused their harm to support a medical malpractice action. But, under the
current state of Pennsylvania jurisprudence, the statute of limitations commences in
many cases before the plaintiff, despite the exercise of due diligence, is able to obtain
such a professional opinion.

“To avert this fundamental unfairness, we should construe the discovery rule so as to toll
the statute of limitations until the plaintiff obtains, or with the exercise of due diligence
should have obtained, medical evidence sufficient to enable the plaintiff to link her injury
to the acts of the defendant,” the dissent argued.

Wilson v. El-Daief, No. 39 MAP 2008 (Pa. Feb. 19, 2009).

Texas High Court Says Exception To Liability Cap Applies Only
To Negligent Insurers, Not To Physicians
A divided Texas Supreme Court found March 6, 2009 that an exception to the state’s
malpractice damages cap that allows further recovery when a liability insurer negligently
fails to settle claims, applies only to insurers and does not apply to physicians.

The high court explained that, under the Medical Liability and Insurance Improvement Act
of 1977 (Act), one provision caps the liability of physicians above a fixed amount, and a
second provision creates an exception to this cap when the physician’s insurer has
negligently failed to settle a claim within the limits of the physician’s liability policy.

After Vicki Bramlett, a healthy 36-year-old, died from post-operative complications
following a hysterectomy, her survivors sued the physician who performed the operation,
Dr. Benny Phillips, and the medical center where the surgery took place, alleging
negligence in her care and treatment.

The medical center settled the suit but the action against Phillips went to trial. A jury
found the doctor and medical center negligent, awarding $11 million in damages and
apportioning responsibility, 75% to the doctor and 25% to the medical center. The jury
also found the doctor grossly negligent, and awarded $3 million in punitive damages.

The trial court denied the doctor’s request to limit his liability under the Act. The appeals
court affirmed and Phillips appealed.

The common law imposes a duty on liability insurers to settle third-party claims against
their insureds when reasonably prudent to do so, the high court noted.

Under the Act, if an insurer’s negligent failure to settle results in an excess judgment
against the insured, the insurer is liable under the so-called “Stowers Doctrine” for the
entire amount of the judgment, including that part exceeding the insured’s policy limits,
the high court explained.

Such claim is the physician's to bring, the high court said.

The high court noted that appeals courts in Texas have disagreed as to whether the Act’s
exception to the damages cap applies only to insurers or extends to physicians.

After examining the plain meaning of the statute and its legislative history, the high court
held that “[w]hen insurance coverage is below the cap, this Stowers-exception claim may
be shared by the insured physician and the injured third party because both will
potentially have excess claims when the damages finding exceeds the cap. When
insurance coverage is above the cap, however, the physician is fully protected, and only
the injured third party [i.e., the physician] has incentive to pursue the statutory Stowers

Accordingly, the high court found that in this case, the judgment against the physician
may not exceed the statutory damages cap.

Thus, the high court concluded that the Stowers exception “expressly applies to insurers
only and does not waive the liability cap” generally.

A dissenting opinion argued the majority court’s interpretation “subjects insurers to
liability beyond that which Stowers would allow.”

Phillips v. Bramlett, No. 07-0522 (Tex. Mar. 6, 2009).

Medical Records

Attorney Who Shares Confidential Medical Records With Third
Party May Be Held Liable For Unauthorized Disclosure, Ohio
High Court Says
A waiver of confidentiality for litigation purposes is limited to the specific case for which
medical records are sought, and an attorney who violates such limited waiver by
disclosing the records to a third party unconnected to the litigation may be held liable for
these actions, the Ohio Supreme Court ruled July 9, 2008 in a 5-2 opinion.

In reaching this conclusion, the majority of the Ohio high court ruled in favor of plaintiff
Kenneth Hageman in his action against his ex-wife’s attorney, Barbara Belovich, alleging
she improperly disclosed his psychiatric treatment records.

The high court majority affirmed an appellate court ruling reversing the trial court’s
decision to grant summary judgment in favor of the attorney, and remanded the case for
further proceedings.

The underlying case involves Hageman’s psychiatric treatment for bipolar disorder with
Dr. Thomas Thysseril, which began in January 2003 and ended seven months later.
During this time, Hageman admitted having homicidal thoughts about his wife.

Also during this treatment period, Hageman’s wife filed for divorce, retaining Belovich as
her attorney. Hageman filed a counterclaim, in which he sought legal custody of the
couple’s minor child.

In addition, while Hageman was undergoing treatment, he allegedly assaulted his wife at
their home, and criminal charges were brought against him. Under a civil domestic
violence protection order, Hageman’s contact and visitation rights with his child were
suspended pending a hearing.

In preparation for that hearing, Belovich subpoenaed Thysseril, seeking production of
Hageman’s medical records. Belovich concluded that, under Ohio law, Hageman had
waived his physician-patient privilege to those records by filing his counterclaim for
custody in the divorce action.

In response to the subpoena, Thysseril faxed Hageman’s records to Belovich, even
though Hageman never signed a release for this information.

On the date of the hearing, Belovich met with the prosecutor in the criminal case against
Hageman, and gave him a copy of Hageman’s psychiatric treatment records.

Hageman ultimately entered into a separation agreement with his wife that was
incorporated into a divorce decree entered by the trial court, and his records were never
admitted into evidence in either the divorce case or the criminal matter (for which he was
subsequently acquitted).

Hageman then sued Belovich, along with other defendants (including his ex-wife,
Thysseril, and Thysseril’s employer), on grounds of improper disclosure of his medical
records. The trial court granted summary judgment to all of the defendants.

The appeal court affirmed the trial court’s grant of summary judgment as to all
defendants except Belovich, finding she had “overstepped her bounds” when she shared
information regarding Hageman’s psychiatric condition with the prosecutor in Hageman’s
criminal case.

A majority of the Ohio Supreme Court agreed, finding a waiver of medical confidentiality
for litigation purposes is limited to the specific case for which the records are sought. The
majority opinion also found that an attorney may be held liable for violating this limited
waiver by disclosing the records to a third party without authorization.

In this case, Hageman waived his medical privilege for the purposes of determining child
custody as part of divorce proceedings, the high court majority concluded.

“Whatever discomfort arose form this disclosure of . . . confidential information was
tempered by the possibility of success on his custody claim,” the majority opinion said.
“However, there is neither a legal justification for nor a practical benefit to the
proposition that a waiver for a specific, limited purpose is a waiver for another purpose.”

The high court majority also concluded that Belovich’s actions in giving the psychological
records she obtained in the divorce case to the prosecutor in the criminal case violated
Hageman’s rights to keep that information confidential.

“Allowing attorneys with such information obtained through discovery to treat the
information as public would violate the policy of maintaining the confidentiality of
individual medical records,” the majority opinion said. Moreover, “[c]reating an expansive

waiver would be inconsistent with the generally recognized confidentiality provisions in
Ohio and federal law.”

A dissenting opinion criticized the majority’s recognition of a new tort creating liability on
the part of opposing counsel for using medical records received pursuant to a properly
issued subpoena when a patient waived the physician-patient privilege.

Under the facts of the case, “the attorney who lawfully came into possession of the
records, which were no longer privileged, owned no duty to Hageman,” the dissenting
opinion said. “Rather, in the proper representation of her client, who allegedly had been a
victim of an assault, [the attorney] provided the information” to the prosecutor in
Hageman’s criminal case.

“While there may be compelling public policy reasons for imposing a duty to maintain the
confidentiality of a patient’s medical records when they are produced by opposing counsel
in the course of litigation, ‘the legislative branch is the ultimate arbiter of public policy,’”
the dissenting opinion said. “The majority today invades the province of the legislature by
judicially creating this new cause of action.”

Hageman v. Southwest Gen. Health Ctr., No. 2008-Ohio-3343 (Ohio July 9, 2008).

Program Integrity Contractors
CMS Says RACs Recovered Nearly $700 Million In Improper
Medicare Payments
The recovery audit contractors (RACs) pilot program has returned $693.6 million in
improper payments to the Medicare Trust Fund between 2005 and March 2008, according
to a July 2008 report issued by the Centers for Medicare and Medicaid Services (CMS).

Of the overpayments, 85% were collected from inpatient hospital providers, 6% from
inpatient rehabilitation facilities, and 4% from outpatient hospital providers, CMS said.

According to CMS, the RACs corrected over $1 billion of improper Medicare payments
from 2005 through March 2008, with roughly 96% representing overpayments collected
from providers and the remainder amounting to underpayments repaid to providers.

The evaluation report also indicated that only 4.6% of the RACs' overpayment
determinations were overturned on appeal.

CMS said most of the improper payments the RACs identified occurred when healthcare
providers failed to comply with Medicare’s coverage or coding rules.

The pilot program, mandated by the Medicare Modernization Act of 2003, began in
California, Florida, and New York in 2005, and was expanded in July 2007 to Arizona,
Massachusetts, and South Carolina.

Congress has since made the program permanent and required its expansion nationwide.

“A key part of the future recovery audit contractor program will be to contract with a RAC
validation contractor to conduct independent third-party reviews of RAC claim
determinations,” said CMS Acting Administrator Kerry Weems.

Weems added that other changes will include limiting the claim review look-back period
to three years, requiring each RAC to hire a medical director, and conducting further
outreach to providers.

Updated Report On RAC Demo Issued By CMS
In a January 2009 update report on the recovery audit contractor (RAC) pilot program,
the Centers for Medicare and Medicaid Services (CMS) said that RACs corrected more
than $1.03 billion in Medicare improper payments.

Approximately 96% of the improper payments were overpayments collected from
providers, and 4% were underpayments repaid to providers, the report said.

The new report includes updated appeals statistics through August 31, 2008.

According to the new data, 22.5% of RAC determinations were appealed, with 7.6%
being overturned on appeal.

In the July 2008 report, CMS reported that only 4.6% of the RACs' overpayment
determinations were overturned on appeal.

CMS concluded that it would use the information in the report “to implement more
provider education and outreach activities or establish[] new system edits, with the goal
of preventing future improper payments.”

CMS’ Weems Announces New RACs, Describes Other Program
Integrity Strategies At AHLA Fraud Conference
The Centers for Medicare and Medicaid Services (CMS) is intensifying and changing its
strategies for curbing fraud and abuse in the Medicare program, CMS Acting
Administrator Kerry Weems told attendees at the American Health Lawyers Association
and Health Care Compliance Association annual Fraud and Compliance Forum in
Baltimore, Maryland.

During his October 6, 2008 remarks, Weems highlighted recent developments in the
national Recovery Audit Contractor (RAC) program and more aggressive and targeted
efforts to identify fraudulent activity in the home health agency and durable medical
equipment (DME) settings.

CMS this week named four permanent RACs for the program’s nationwide launch
following a three-year demonstration, Weems said.

According to a CMS fact sheet, the RACs, and the initial areas where they will be
operating are:

      Diversified Collection Services, Inc. of Livermore, California (Region A—Maine,
       New Hampshire, Vermont, Massachusetts, Rhode Island, and New York);
      CGI Technologies and Solutions, Inc. of Fairfax, Virginia (Region B—Michigan,
       Indiana, and Minnesota);
      Connolly Consulting Associates, Inc. of Wilton, Connecticut (Region C, South
       Carolina, Florida, Colorado, and New Mexico); and
      HealthDataInsights, Inc. of Las Vegas, Nevada (Region D—Montana, Wyoming,
       North Dakota, South Dakota, Utah and Arizona).

Under the Tax Relief and Health Care Act of 2006, CMS must have a national RAC
program in place by January 1, 2010. CMS indicated that additional states will be added
to each RAC region in 2009.

RACs review Medicare Parts A and B claims and are paid a contingency fee for any
improper payments they identify, whether over or underpayments. They must return,
however, any fees for payments that are later determined not to be improper.

Weems told attendees that the nationwide rollout of the program reflects lessons learned
from the demo in California, Florida, New York, Massachusetts, South Carolina, and
Arizona, including requiring RACs to have a medical director, coding experts, and
credentials of reviewers available on request.

CMS said providers would not receive correspondence from the RAC until they had a face-
to-face meeting with the agency, set to begin in November.

Final Five Medicare Part A And Part B MACs Named By CMS
The Centers for Medicare and Medicaid Services (CMS) has selected its last five Medicare
Administrative Contractors (MACs) that will process and pay claims for healthcare
services under the Medicare fee-for-service program.

The new contractors will take over the claims payment that is currently performed by
fiscal intermediaries and carriers, CMS said.

The agency has now met its goal of awarding all 15 MAC contracts, which will fulfill the
requirements of the Medicare Prescription Drug, Improvement, and Modernization Act of
2003 (MMA) contracting reform provisions, CMS said.

The final five Part A and B MAC contractors will immediately begin their implementation
activities and will assume full responsibility for the claims processing work in their
respective jurisdictions no later than March 2010, CMS said.

According to CMS, all of the contracts include a base period and four one-year options
and will provide the contractors with the opportunity to earn awards based on their ability
to meet or exceed performance requirements set by CMS.

The five new MACs are: Noridian Administrative Services, LLC; National Government
Services; Cahaba Government Benefit Administrators, LLC; Palmetto Government
Benefits Administrators, LLC; and Highmark Medicare Services.

CMS Says National Rollout Of RAC Program Cleared To Get
The Centers for Medicare and Medicaid Services (CMS) said a bid protest that caused the
agency to suspend contract work for the Recovery Audit Contractor (RAC) program has
now been resolved, clearing the way for the national rollout to get underway.

According to an update posted on CMS’ website, the bid protests, filed by two
unsuccessful bidders Viant Inc. and PRG Schultz, USA, were settled on February 6, 2009.
Under the settlement, Viant Inc. and PRG Schultz will serve as subcontractors to the
permanent RACs, which the agency announced in October 2008.

CMS said each subcontractor has negotiated different responsibilities in each region,
including some claims review.

The two bidders filed their protests with the Government Accountability Office in
November 2008, resulting in an automatic stay of contract work.

CMS said over the next several months it will begin provider outreach sessions involving
the RACs.

Medical Center Sues Over RAC Overpayment Determination, Says
Reopening Untimely
Palomar Medical Center filed a complaint March 24, 2009 in California federal district
court disputing a Recovery Audit Contractor’s (RAC’s) overpayment determination for
medical services provided to a patient in the hospital’s inpatient rehabilitation facility

According to plaintiff Palomar Medical, a 320-bed acute care hospital in Escondido,
California, the RAC, PRG-Schultz International, reopened the cost report at issue more
than one year after payment without showing “good cause” as required by Medicare
regulations. See 42 C.F.R. § 405.980(b)(1).

The services had been paid in July 2005; PRG-Schultz, which participated in Medicare's
three-year RAC demonstration, retroactively denied coverage of care in July 2007.

Palomar Medical appealed the overpayment determination, amounting to $7,992.92,
unsuccessfully to a Medicare fiscal intermediary and a qualified independent contractor,
and then to an administrative law judge (ALJ), who found the rehabilitation services at
issue should have been provided at a lower level of care than plaintiff’s IRF but agreed
the RAC had not timely reopened the claim.

Under Section 405.980(b)(1), the Secretary may reopen a Medicare claim more than one
year after payment only on a showing of “good cause” based on “new and material
evidence that was not available or known at the time of the determination” or that an
obvious facial error was made at the time of payment.

The Department of Health and Human Services (HHS) Secretary, through the Medicare
Appeals Council, reversed the ALJ’s decision, saying ALJs lack jurisdiction to determine
whether RACs lawfully reopen claims.

The complaint, filed in the U.S. District Court for the Southern District of California, seeks
reversal of the Secretary’s final adverse agency decision, alleging it violates Palomar
Medical’s due process rights, violates the applicable Medicare statute and regulations, and
is arbitrary, capricious, an abuse of discretion, and otherwise contrary to law.

Medicare Advantage
MA Organizations Had Lower Spending, Higher Profits In 2005
Than Initial Projections, GAO Finds
Medicare Advantage (MA) organizations saw profits of $1.14 billion above their
initial projections in 2005 while, on average, spending less on medical expenses (85% of
total revenue) than they anticipated (90.2%), the Government Accountability Office
(GAO) found in a recent report.

The letter report, Medicare Advantage Organizations: Actual Expenses and Profits
Compared to Projections for 2005 (GAO-08-827R), was requested by House Ways and
Means Subcommittee on Health Chairman Pete Stark (D-CA).

“Private plans in Medicare spend even less on medical care than they report to CMS—to
the tune of over a billion dollars in one year alone. These funds go directly into the
pockets of big insurance companies—not toward medical care for beneficiaries,” Stark
said in a statement.

But the Centers for Medicare and Medicaid Services (CMS) in commenting on the report
said the 2005 figures should not be viewed as representative of the program due to
notable changes in subsequent years, including a requirement that actuaries attest to the
accuracy of projections and differences in the Adjusted Community Rate Proposal

“The report does not fully recognize that the 2005 base year was vastly different from the
current competitive bidding process mandated by the [Medicare Modernization Act of
2003]," CMS Acting Administrator Kerry Weems said.

CMS also emphasized that the differences between projected and actual expenses and
profits did not affect Medicare payments to MA organizations or the benefits they would
have provided and that one outlier MA organization was responsible for nearly half the
aggregate difference.

GAO said, however, the “accuracy of MA organizations’ projections is important because,
in addition to determining Medicare payments, these projections also affect the extent to
which MA beneficiaries receive additional benefits not provided under FFS and the
amounts beneficiaries pay in cost sharing and premiums.”

According to GAO, nearly two-thirds of beneficiaries were enrolled in MA plans for which
the percentage of revenue dedicated to profits was greater than projected, while
expenditures fell below initial forecasts.

“I should not have had to ask GAO for a report on the actual medical loss ratios of
Medicare Advantage plans. CMS is required by law to conduct audits of these plans. They
aren’t doing their job because the Bush Administration is perfectly happy to have billions
of dollars going to insurance companies instead of Medicare beneficiaries,” Stark said.

Eleventh Circuit Remands Claims Against Medicare Advantage
Plan Administrator Finding No Federal Jurisdiction
The Eleventh Circuit remanded to state court a case in which seven Medicare
beneficiaries alleged several state law-based claims against the administrator of the
Medicare Advantage program in which they were enrolled.

In so holding, the appeals court disagreed with the plan administrator's argument that
because at least one of the claims arose under the Medicare Act, the federal court would
have jurisdiction. Instead, according to the appeals court, the Medicare Act strips federal
courts of federal question jurisdiction.

Seven individual beneficiaries of the federal Medicare program—Della Dial, A.C. Johnson,
Nancy Porter Norfleet, Constance Taylor, Abraham Washington, Laura B. Washington,
and Georgia M. Woods (collectively, plaintiffs)—were enrollees in a Medicare Advantage
plan administered by Healthspring of Alabama, Inc.

Plaintiffs filed a complaint in state court against Healthspring, which removed the action
to federal court. The district court concluded that at least one claim for relief arose under
federal law. Plaintiffs appealed.

Healthspring argued the Medicare Act expressly preempts state substantive law, see 42
U.S.C. § 1395w-26, and provides the exclusive remedy for at least some of the
allegations in the complaint, thereby providing federal question jurisdiction.

The appeals court said, however, that the Medicare Act "strips federal courts of primary
federal-question subject matter jurisdiction" over claims that arise under the Act. See
Cochran v. U.S. Health Care Fin. Admin., 291 F.3d 775, 779 (11th Cir. 2002).

"In place of that primary federal-question jurisdiction, the Act provides for an
administrative hearing before the Secretary of the Department of Health and Human
Services," the appeals court explained.

Thus, "[b]ecause the plaintiffs’ action is not a 'civil action of which the district courts have
original jurisdiction,' the action is not removable," the appeals court held. See 28 U.S.C.
§ 1441(b); Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987).

Accordingly, the appeals court remanded to the district court with instructions to remand
the case to the state court from which it was removed.

Dial v. Healthspring of Ala., Inc., No. 07-15529 (11th Cir. Aug. 26, 2008).

Humana Will Pay $750,000 To Settle Allegations Of Medicare
Advantage And Part D Marketing Compliance Issues
Humana Insurance Company will pay a $750,000 settlement to the Wisconsin Office of
the Commissioner of Insurance (OCI) in connection with allegations of non-compliance
with Medicare Advantage and Part D marketing rules, according to an agency press
release posted September 10.

The settlement comes after a market conduct examination conducted by the OCI
revealed significant issues with Humana's compliance procedures and oversight of
Medicare Advantage and Medicare Part D marketing practices.

Humana had notified the OCI that it had developed procedures to prevent agents who
were not properly certified and licensed from receiving commissions for Medicare
Advantage and Medicare Part D products, the release noted.

"However, the examination determined that Humana continued to accept applications and
pay commissions," the release said.

In agreeing to the settlement, Humana denies the allegations in the examination report,
and any violation of law.

CMS Issues Final Rules To Curb Abusive Marketing Tactics By
Medicare Advantage, Part D Plans
The Centers for Medicare and Medicaid Services (CMS) issued September 15, 2008 final
rules intended to tighten restrictions on the marketing activities of Medicare Advantage
(MA) and Medicare prescription drug plans and impose stiffer penalties for non-

The two rules issued this week implement new prohibitions on door-to-door marketing
and cold-calling and add requirements related to broker/agent commissions.

Medicare private plan marketing activities have come under increasing scrutiny of late
with reports of “hard sell” tactics and concerns about the adequacy of federal oversight.

“The regulations give insurers bright-line guidance on what types of marketing activities
are acceptable and what types are not acceptable,” said CMS Acting Administrator Kerry
Weems. CMS also plans to step up its oversight activities, Weems said, including tripling
the number of “secret shopper” activities in which agency officials pose as potential
enrollees and monitor sales agents’ practices.

The new marketing requirements are effective October 1, 2008 with open enrollment for
Medicare Part D beginning November 15, 2008.

CMS proposed the new marketing restrictions in May 2008. The final rule (73 Fed. Reg.
54208) bans a number of practices, including providing meals to beneficiaries as part of
marketing activities; telemarketing, door-to-door solicitation, and other sales contacts
made without a beneficiary’s express invitation; cross-selling of non-healthcare related
products during sales or marketing presentations; conducting sales presentations where
healthcare services are delivered; and conducting sales activities at educational events.

CMS also issued an interim final rule (73 Fed. Reg. 54226), which also goes into effect
October 1 but is open to public comment until November 15, that defines a compensation
structure for agents and brokers.

The interim final rule is intended to reduce so-called “churning,” or moving a beneficiary
from one plan to another plan based on financial incentives.

The interim final rule establishes a six-year compensation structure that limits first-year
compensation for an agent or broker to no more than 200% of the total compensation for
each of the next five renewal years, according to an agency fact sheet.

Under this structure, an agent or broker can only earn compensation in months four
through 12 of the enrollment year.

The interim final rule also contains a number of other provisions mandated under the
Medicare Improvements for Patients and Providers Act (MIPAA), which Congress passed
in July 2008.

These provisions include expanding quality improvement program requirements for
special needs plans, eliminating the late enrollment penalties for low-income
beneficiaries, requiring plans to pay electronic claims within 14 days and paper claims
within 30 days, and requiring private-fee-for-service plans and Medicare Medical Savings
Account Plans to establish a quality improvement program meeting certain regulatory
requirements beginning in 2011.

In a statement, Senate Finance Committee Chairman Max Baucus (D-MT), who has
led the investigation into abusive Medicare private plan marketing tactics, applauded the
new regulations, which he said track the marketing safeguards included in the MIPAA.

“CMS is moving in the right direction today, by following the new Medicare law’s call to
draw clear lines that will weed out unscrupulous marketing agents who prey on seniors
for profit,” Baucus said.

Baucus also noted that CMS had not capped agent or broker compensation, but did set
other rules to limit compensation to fair market value. Baucus said the Finance
Committee would be monitoring how plans set compensation values for agents.

CMS Issues Additional Guidance On MA, Drug Plan Marketing
The Centers for Medicare and Medicaid Services (CMS) has issued further guidance to
help the industry implement new marketing regulations for Medicare Advantage (MA) and
Part D plans.

The latest implementation guidance was released in the form of two memos from CMS
Center for Drug and Health Plan Choice Director Abby L. Block on October 8 and October
17, 2008.

The October 8 memo said CMS had become aware of third-party organizations contacting
plans and/or agents and offering services that would, if accepted, put the plan out of
compliance with applicable federal regulations.

CMS made clear in the memo that third-parties may not make unsolicited MA
or prescription drug plan (PDP) marketing calls to beneficiaries to set up appointments
with potential enrollees.

“Any plan or its representative that accepts an appointment to sell an MA or PDP product
that resulted from an unsolicited contact with a beneficiary regardless of who made the
contact will be in violation of the prohibition against unsolicited contacts,” the memo said.

The October 17 memo adds that not all third-party leads are prohibited—i.e. leads may
still be generated through mailings, websites, advertising, and public sales events.

The memo does stress that “[u]nsolicited third-party leads are prohibited” and proceeds
to list what CMS considers illegal, unsolicited contacts, including the use of old lists or
consents, referrals of beneficiaries and/or their contact information, and contacting
members who are voluntarily disenrolling

The October 17 memo also indicates that CMS is now requiring a new disclaimer when an
educational event is organized, sponsored, or promoted by a plan—namely, “This event is
only for educational purposes and no plan specific benefits or details will be shared.”

The two memos also discuss the scope of appointments, meals, cross-selling,
agent/broker compensation, payment of appointment fees, and application of the
marketing provisions to employer/union group plans.

On October 24, 2008, however, CMS announced that it was withdrawing the October 8
guidance on compensation structure requirements for MA agents and brokers.

The decision to rescind the sub-regulatory guidance came in the form of a one-paragraph
memorandum from CMS Center for Drug and Health Plan Choice Director Abby L. Block.

“CMS is aware that there is significant concern about agent/broker commissions for
benefit year 2009,” the memo said. The memo said CMS is working on ways to address
those concerns and expects to take regulatory action soon.

“We strongly suggest that you keep this in mind as you contemplate making any final
arrangements regarding commission structures,” the memo said.

Along with new marketing restrictions, CMS in September 2008 published rules intended
to reduce so-called “churning,” or moving a beneficiary from one plan to another plan
based on financial incentives.

The rules established a six-year compensation structure that limits first-year
compensation for an agent or broker to no more than 200% of the total compensation for
each of the next five renewal years.

House Ways and Means Subcommittee on Health Chairman Pete Stark (D-CA) in a letter
to CMS Acting Administrator Kerry Weems, said some MA plans had announced upcoming
broker commissions “that far exceed any previous year’s commissions.”

Stark said he was “gravely concerned” that without immediate action by CMS, “these
elevated commissions will lead to an unprecedented amount of churning of beneficiary
enrollment this year, in a way that is disruptive to their care and detrimental to their

One possible way to address this problem, Stark suggested, would be to cap commissions
at a reasonable rate, for example, based on a percentage of what was offered in previous

Senate Finance Committee Chairman Max Baucus (D-MT) also called on CMS to stop
excessive commissions for MA agents.

“Giving agents an incentive to switch Medicare beneficiaries into a new plan puts seniors
at risk of having fewer benefits and higher costs,” said Baucus. “Medicare Advantage
plans that have nearly quadrupled agent commissions are putting profits before patients
and that’s wrong. If these insurance companies aren’t going to make sure they are
looking out for seniors’ then I’m going to make sure CMS does it for them," Baucus said.

Baucus said provisions in the Medicare Improvements for Patients and Providers Act
(MIPPA) of 2008 limit the commissions insurers can offer sales agents.

CMS Revises Rules For MA And PDP Agent Commissions
The Centers for Medicare and Medicaid Services (CMS) issued an interim final rule with
comment period (73 Fed. Reg. 67406) revising compensation requirements for agents
and brokers selling Medicare Advantage (MA) and prescription drug plans (PDPs) to
Medicare beneficiaries.

The revisions modify rules CMS issued on September 18, 2008 (73 Fed. Reg. 54226). In
addition to new marketing restrictions, those rules established a six-year compensation
structure that limited first-year compensation for an agent or broker to no more than
200% of the total compensation for each of the next five renewal years.

Although intended to reduce so-called “churning,” or moving a beneficiary from one plan
to another plan based on financial incentives, House Ways and Means Subcommittee on
Health Chairman Pete Stark (D-CA) and Senate Finance Committee Chairman Max
Baucus (D-MT) said the rules in fact could have the opposite effect and lead to excessive
agent/broker commissions.

In an October 24 memorandum, CMS rescinded earlier sub-regulatory guidance on
compensation structure requirements and signaled plans to take additional regulatory
action before the start of open enrollment on November 15, 2008.

According to an agency press release, the latest interim final rule, which is effective as of
November 10, 2008 modifies the September 18, 2008 rules by:

      Specifying all compensation paid to agents and brokers reflect fair-market value
       based on the commissions paid in the past, adjusted for inflation, for similar
       products in the same geographic area.
      Requiring renewal compensation be no more, or no less, than half of the
       compensation paid for that beneficiary in the initial year of the six-year
       compensation cycle established in the Sept. 18 rule.
      Imposing similar limits on payments to organizations such as Field Marketing
       Organizations, which help plans market and sell their Medicare products and train
       agents and brokers.
      Requiring plans to submit to CMS their compensation structures for the previous
       three years plus the compensation structure they are implementing for 2009.

In addition, to prevent churning, plans must still initially pay renewal rate compensation
in 2009 rather than the initial year compensation amounts for all plan changes, according
to the press release.

Once CMS identifies an initial commission was warranted, plans are to pay retrospectively
agents and brokers an additional amount for a total payment of the initial compensation
rate as filed with CMS.

CMS Issues Revised Call Letter For 2010
The Centers for Medicare and Medicaid Services (CMS) issued February 23, 2009 a
revised draft call letter for Medicare Advantage (MA) organizations and prescription drug
plan (PDP) sponsors.

CMS issued the original draft call letter on January 8, 2009 before President Bush left
office. The Obama administration announced January 22, 2009 it was rescinding the 2010
draft call letter pending further review.

House Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) praised the
revised draft call letter issued this week by CMS.

“The differences between the call letters of the Bush and Obama Administrations are
night and day,” said Stark. According to Stark, the new letter “strengthens protections to
prevent private plans from discriminating against sicker beneficiaries; establishes new
guidelines to prevent aggressive plan marketing to beneficiaries; and proposes to require
plans to publicly identify their actual spending on benefits.”

The draft call letter includes a number of items aimed at further protecting enrollees and
informing them about their MA and Part D plan options, said CMS Center for Drug and
Health Plan Choice Director Abby L. Block in a memorandum accompanying the call

CMS said it will separately issue technical and procedural clarifications regarding bid and
formulary submissions, benefits, HPMS data, marketing models, and other operational

Block noted CMS does not currently publicize plans’ medical loss ratio, but that various
stakeholders have expressed an interest in the agency doing so. “Before we reach a
decision, we are interested in soliciting comments on how the Medical Loss Ratio should
be calculated,” Block said in the memo.

CMS issued the final call letter on March 30, 2009.

The final call letter asks MA organizations to eliminate plans with low enrollment that do
not significantly differ from other plans they already offer.

“These low-volume plans crowd the field and make selecting a plan much more difficult
for Medicare beneficiaries,” CMS said in a press release.

According to CMS, 27% of total MA plans have fewer than 10 enrollees. CMS said
eliminating these plans should help beneficiaries make plan-to-plan comparisons more

To this end, CMS said it expected MA organizations to offer no more than three MA plans
by plan type in a market area, "and ensure that each plan offered is readily
distinguishable from the others based on plan type, benefits offered, access, or other
features that permit beneficiaries to choose a health care plan most suitable to their

CMS said it received about 190 comments on the revised draft.

One area where CMS specifically sought comments was on whether the agency should
publicize plans’ medical loss ratio, as a number of stakeholders have urged CMS to do.

“Given this issue’s complexity, we will continue evaluating methodologies for possible
future implementation,” said CMS’ Center for Drug and Health Plan Choice Acting Director
Jonathan Blum in the call letter.

Blum also said CMS would continue to study the issue of its reassignment processes for
low-income subsidy eligible individuals for potential future improvements that are
consistent with the agency’s statutory authority.

For 2010, CMS will be taking new steps to review MA plan cost-sharing to ensure sicker
beneficiaries are protected from discriminatory out-of-pocket charges. CMS said it would
specifically be reviewing plan benefits to ensure cost-sharing for renal dialysis, Part B
drugs, or home health or skilled services are not higher than what they are under
traditional Medicare.

In addition, MA and PDP plan sponsors will be asked to conduct audits on the data
provided to CMS about the operation of their plans.

CMS also noted that its current financial and program compliance audits will become
more targeted, data-driven, and focused on areas with the greatest potential for
beneficiary harm such as enrollment operations, appeals and grievances, and marketing.

CMS Moves To Restart DMEPOS Competitive Bidding Program
The Centers for Medicare and Medicaid Services (CMS) issued January 16, 2009 in the
Federal Register (74 Fed. Reg. 2873) an interim final regulation with comment period to
implement statutory changes to the Medicare competitive bidding program for durable
medical equipment, prosthetics, orthotics and supplies (DMEPOS) that Congress
temporarily put on hold.

The Medicare Improvements for Patients and Providers Act (MIPPA), passed in July 2008,
temporarily delayed for 18 months the controversial DMEPOS competitive bidding

program, which began in 10 metropolitan statistical areas on July 1, 2008, citing
concerns about flaws in the program’s design.

In a press release, CMS said the interim final rule issued this week, along with a new
federal advisory committee, are the next steps to restarting the competitive bidding

Under the MIPPA, CMS had to terminate existing contracts awarded in the first round of
competitive bidding. The law instructed CMS to re-compete the contracts in 2009.

As required by the MIPPA, the interim final regulation excludes certain areas and items
and services from the competitive bidding program; establishes a “covered document”
review process for providing feedback to suppliers regarding missing financial documents;
requires DMEPOS suppliers that are awarded a contract under the program to disclose to
CMS information regarding subcontracting relationships; and exempts hospitals that
furnish certain types of DMEPOS items to their own patients from the competitive bidding

According to CMS, the first round of the competitive bidding program was projected to
save Medicare 26% in payments that would have been made under traditional fee

CMS also announced the members of a new Program Advisory and Oversight Committee
that will provide the agency with input on implementing competitive bidding for

The advisory committee includes representatives of beneficiaries and consumers,
physicians, suppliers, and other experts, CMS said.

CMS Delays DMEPOS Competitive Bidding Rule
The Centers for Medicare and Medicaid Services (CMS) will delay the effective date of an
interim final rule to implement statutory changes to the Medicare competitive bidding
program for durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS)
from February 17, 2009 to April 18, 2009.

The rule was delayed pursuant to a January 20, 2009 memorandum from White House
Chief of Staff Rahm Emanuel directing agencies to halt publication of all regulations until
a department or agency head appointed by President Obama reviewed the regulation.

CMS Says It Will Not Further Delay DMEPOS Competitive
Bidding Rule
The Centers for Medicare and Medicaid Services (CMS) announced April 17, 2009 that it
will not further delay the Medicare competitive bidding rule for durable medical
equipment, prosthetics, orthotics and supplies (DMEPOS).

Based on its review and on "the need to ensure that CMS is able to meet the statutory
deadlines contained in the Medicare Improvements for Patients and Providers Act
(MIPPA), the Administration has concluded that the effective date should not be further

Thus, the rule is effective as of April 18, 2009. CMS said it plans to issue further
guidelines on the timeline for bidding requirements in the upcoming weeks.

Earlier in the week, the American Association for Homecare and 27 other DME providers
sent a letter April 13, 2009 urging the withdrawal of the competitive bidding rule.

The letter, addressed to Charles Johnson, Acting Secretary of the Department of Health
and Human Services, Charlene Frizzera, Acting Administrator of the Centers for Medicare
and Medicaid Services (CMS), and Nancy-Ann DeParle, Director of the new White House
Office of Health Reform, warned that the rule if implemented “would reduce access to
care and put thousands of DME providers out of business.”

The letter argued that fundamental flaws remained in the program even after Round One
of competitive bidding was delayed as part of MIPPA.

“[T]houghtful and deliberate rulemaking by CMS was clearly expected by Congress, given
the overwhelming level of congressional and stakeholder concern during initial
implementation,” the letter said; however, “[t]his process did not take place and the
flaws in the bidding program remain.”

According to the letter, the program would actually reduce competition and lower quality.

While proponents of the competitive bidding program argue that it will reduce Medicare
spending, “the inevitable cutbacks in services will result in increased length and cost of
hospital stays,” the letter said.

“Home medical equipment and care is already the most cost-effective, slowest-growing
portion of Medicare spending,” the letter argued.

Case Law Developments
U.S. Court In D.C. Says Secretary Violated Medicare Bad Debt
Moratorium By Applying New Policy
The U.S. District Court for the District of Columbia held May 30, 2008 that the Secretary
of the Department of Health and Human Services (HHS) is bound, by a congressional
moratorium, to pre-August 1987 polices for determining Medicare bad debt and therefore
cannot refuse to reimburse a provider for debts on the ground they were referred to a
collection agency as such action would constitute a change in policy.

To be reimbursed for Medicare bad debt, providers must satisfy four criteria—namely,
that the debt is related to the covered services, as well as derived from unpaid deductible
and coinsurance amounts; that reasonable collection efforts have been made; that the
“debt was actually uncollectible when claimed as worthless”; and that “sound business
judgment” established no likelihood of future recovery. 42 C.F.R. § 413.89(e)(1-4).

The question of when an unpaid account becomes “uncollectible” has been the subject of
long-standing debate. On August 1, 1987, in an attempt to shield providers from radical
changes in how this was determined, Congress enacted the so-called “Bad Debt
Moratorium,” which essentially kept the government from enacting new restrictions.

The current dispute arose after Foothill Hospital-Morris L. Johnson Memorial (Foothill)
sought reimbursement for unpaid Medicare deductibles and coinsurance bills, which had
been outstanding for more than 300 days on average, for its fiscal year ending
September 30, 1995. At the same time that Foothill wrote off these bills as uncollectible,
it sent them to an outside collection agency as it does with non-Medicare debt.

When Foothill first sought reimbursement for the delinquent accounts the fiscal
intermediary disallowed $60,993 of its bad debt claims on the ground that “collection

efforts do not come to an end until the provider makes a final decision to cease pursuing
a bad debt item.” The intermediary found that this could only happen when the outside
collection agency ceases collection efforts.

The Provider Reimbursement Review Board (PRRB) reversed the intermediary’s decision,
finding the presumption of collectability based on the outside collections account was
contrary to established precedent.

The CMS Administrator overruled the PRRB, saying “it was reasonable to conclude that
the provider still considers the debt to have value and is not worthless.”

In its subsequent federal district court action, Foothill argued a presumption of
collectability based on outside collection account status constituted a change in policy
that violated the Bad Debt Moratorium. The court agreed.

Unlike other courts to consider the issue, the U.S. District Court for the District of
Columbia focused its analysis, one apparently of first impression, on whether the Bad
Debt Moratorium applies only to an individual Medicare provider’s polices or whether it
also limited the Secretary’s own policies.

Reviewing the statutory language, the court found the moratorium unambiguously stated
that the Secretary “shall not make any change in policy in effect on August 1, 1987.” 42
U.S.C. § 1395f. Moreover, the moratorium was a response to the HHS Inspector
General’s plan to make bad debt reimbursement more restrictive; thus, the focus was on
the Secretary’s policies.

The court next determined that a “blanket prohibition against reimbursement while
collection efforts are ongoing constitutes a change in policy, for this policy did not exist
prior to the effective date of the Moratorium.”

The court found that at the time the Bad Debt Moratorium was enacted none of the
policies that the CMS Administrator relied on were in use. Therefore, applying any of the
newer policies would contradict the intent of the moratorium. Moreover, the several
agency sources that predated the moratorium suggested that even when a delinquent
payment is at a collection agency that payment can still be considered uncollectible.

Therefore, the court vacated the CMS Administrator’s decision and remanded the case to
the Secretary, saying it had no jurisdiction to order specific relief.

Foothill Hosp.-Morris L. Johnson Mem’l v. Leavitt, No. 07-701, 2008 U.S. Dist. LEXIS
41816 (D.D.C. May 30, 2008).

D.C. Circuit Finds Secretary Not Required Prior To DRA To
Include Expansion Waiver Population In DSH Adjustment
The D.C. Circuit held June 27, 2008 that the law prior to the passage of the Deficit
Reduction Act of 2005 (DRA) did not require the Department of Health and Human
Services (HHS) Secretary to include expansion waiver patients in the disproportionate
share hospital (DSH) adjustment.

Thus, the appeals court affirmed the district court’s finding that the DRA, which gave the
Secretary explicit discretion to determine whether to include a demonstration project’s
expansion waiver population, was not an illegal retroactive application.

The case involved two groups of Tennessee hospitals serving patients who participate in
the state’s Medicaid plan, TennCare.

TennCare is a non-standard Medicaid program, known as a demonstration. Individuals
who receive federally reimbursable care under TennCare despite not meeting the normal
Medicaid requirements are known as the “expansion waiver population.”

According to the appeals court, before January 2000, the HHS Secretary’s policy was not
to include expansion waiver patients in the Medicaid fraction, which is used to calculate
the DSH adjustment.

Despite this policy, some fiscal intermediaries included the expansion waiver population
in the DSH adjustment, the appeals court said.

In January 2000, the Secretary revised the policy and permitted hospitals to include the
expansion waiver population in the Medicaid fraction (65 Fed. Reg. 3136, 3139);
however, three years later the Secretary issued another revision, excluding the expansion
waiver populations associated with certain demonstration projects likely to deal with
higher-income individuals.

The hospitals here filed cost reports prior to January 2000 and received notices of
program reimbursement that did not take TennCare’s expansion waiver population into
account in calculating the DSH adjustment.

The hospitals appealed to the Provider Reimbursement Review Board (PRRB) and lost.
The hospitals then sued in federal district court claiming the Secretary had unlawfully
refused to count TennCare’s expansion waiver population in the DSH adjustment.

The district court granted the hospitals’ motion for summary judgment. While the case
was pending appeal, the DRA was passed.

The law explicitly gave the Secretary discretion to determine whether to include a
demonstration project’s expansion waiver population in the disproportionate share
calculation. See DRA § 5002(a). The Act also purported to ratify the Secretary’s prior
policies regarding the inclusion or exclusion of the expansion waiver population. Id. §
5002(b)(3)(A), (B).

In light of these provisions, the Secretary moved to alter the judgment. The D.C. Circuit
remanded the case and the district court granted the Secretary’s motion. The hospitals

The appeals court turned first to the hospitals’ argument that the law prior to the DRA
clearly required inclusion of the expansion waiver patients in the disproportionate share
hospital adjustment.

After an examination of the statutory text, the appeals court found “it was unclear, prior
to the Deficit Reduction Act, whether the Secretary had discretion to exclude the
expansion waiver population from the disproportionate share hospital adjustment.”

The appeals court next rejected the hospitals’ argument that the DRA could not be
applied retroactively consistent with Landgraf v. USI Film Products, 511 U.S. 255, 265
(1994), because Congress did not clearly indicate its intention to this effect.

Because of the uncertainty of the law prior to the Act, the appeals court found, “no
problem of retroactivity.”

“The Deficit Reduction Act did not retroactively alter settled law; it simply clarified an
ambiguity in the existing legislation,” the appeals court held.

Cookeville Reg’l Med. Ctr. v. Leavitt, Nos. 07-5252, 07-5269 (D.C. Cir. June 27, 2008).

Ninth Circuit Finds Claims Against Part D Sponsor Preempted By
The Ninth Circuit held August 25, 2008 that claims against Humana related to its failure
to provide timely Medicare Part D prescription drug plan benefits to Medicare beneficiaries
are preempted by the Medicare Prescription Drug Improvement and Modernization Act of
2003 (MMA) and its implementing regulations.

Plaintiffs Do Sung Uhm and Eun Sook Uhm enrolled in Humana's Medicare Part D
prescription drug program, based in part on the representations Humana made in its
marketing materials.

Despite Humana's assurances that the Uhms would receive coverage for their prescription
drugs beginning January 1, 2006, the first day Part D sponsors could provide benefits
under the MMA, the Uhms never received any information or documentation from

Thus, as January 1, 2006 passed, the Uhms had to pay out-of-pocket for their
prescriptions even though they had paid their premium. On February 6, 2006, the
Uhms sued Humana Health Plan, Inc. and Humana, Inc. (collectively Humana) claiming
breach of contract, violation of several state consumer protection statutes, unjust
enrichment, fraud, and fraud in the inducement.

Plaintiffs filed the complaint on behalf of themselves and a putative class consisting of "all
persons who paid, or agreed to pay, Medicare Part D prescription drug coverage
premiums to Humana and who did not receive those prescription drug benefits in either a
timely fashion or at all."

Humana moved to dismiss under Fed. R. of Civ. P. 12(b)(6), and the district court
granted the motion finding plaintiffs' claims were preempted by the MMA. Plaintiffs

The appeals court first noted that under the MMA, Centers for Medicare and Medicaid
Services (CMS) "standards" supercede state law or regulations insofar as the state law or
regulation is "with respect to" a "prescription drug plan" offered by a "PDP sponsor."

After finding no field preemption here, the appeals court said that "State common law is
preempted to the extent that there are federal standards." Humana contended that CMS
had promulgated regulations or standards that govern each of the Uhms’ claims, and
therefore all of their causes of action were preempted, the appeals court explained.

According to Humana, CMS created two mechanisms to deal with disputes: "coverage
determination" procedures and "grievance" procedures. Humana maintained that the
Uhms’ complaints were actually grievances or requests for a coverage determination and
therefore were preempted.

According to the appeals court, the threshold question was whether the Uhms were
"enrollees" as defined in the regulations. Answering in the affirmative, the appeals court
found among other things that under the relevant regulation, an eligible individual

"enrolls" by "filing the appropriate enrollment form with the PDP." "That is precisely what
the Uhms allege they did," the appeals court said.

Having found that plaintiffs were enrollees of the plan, the appeals court then considered
each claim individually, finding the MMA and related regulations preempted all alleged

Uhm v. Humana Inc., No. 06-35672 (9th Cir. Aug. 25, 2008).

U.S. Court In D.C. Dismisses Suit Challenging CMS’ Policies
Regulating Marketing Of Medicare Part D Plans For Lack Of
Medicare beneficiaries eligible for Medicare Part D drug benefits lacked standing to
challenge, on First Amendment grounds, two of the Centers for Medicare and Medicaid
Services’ (CMS’) policies regulating private entity marketing of the Part D drug benefit, a
federal district court ruled August 25, 2008.

The U.S. District Court for the District of Columbia granted the agency's motion to
dismiss for lack of standing, concluding plaintiffs did not show their healthcare providers
declined to provide them with needed advice regarding which Medicare prescription drug
plan to choose based on the CMS marketing guidelines and nursing home policy at issue.

The marketing guidelines provide that healthcare providers “cannot direct, urge, or
attempt to persuade beneficiaries to enroll in a specific plan,” the district court noted. The
guidelines also prohibit providers from marketing by “steering, or attempting to steer, an
undecided potential enrollee towards a plan, or limited number of plans, and for which
the individual or entity performing marketing activities expects compensation directly or
indirectly from the plan for such marketing activities.”

The nursing home policy, detailed in a May 2006 memorandum CMS issued to state
regulatory agencies, provides that “[u]nder no circumstances should a nursing home
require, request, coach, or steer any resident to select or change a [Medicare Advantage
or Part D] plan for any reason.”

The Washington Legal Foundation (WLF) filed the initial complaint in federal district
court on behalf of its members. The court denied WLF’s motion for a preliminary
injunction, finding WLF failed to show likelihood of success on the merits because it did
not have “proper associational standing.”

Subsequently, the WLF attorneys involved in the case amended the complaint to name
their own parents—Rebecca Fox, Mary Samp, and Edward Samp, Jr.,—as plaintiffs. Mr.
Samp died in November 2007.

Plaintiffs asserted that CMS, via its limitations in the agency’s marketing guidelines and
the nursing home policy on the information that healthcare providers may communicate
to Medicare beneficiaries, violated the First Amendment rights of Medicare beneficiaries
to receive information regarding insurance coverage.

Plaintiffs moved for summary judgment, and CMS cross-moved to dismiss for lack of
standing. The district court granted CMS’ motion.

The district court first noted plaintiffs must show CMS prevented healthcare providers
from giving them information they needed and the providers would have been willing to
share “but for the challenged CMS policies.”

The court then found plaintiffs had failed to establish this “right to listen” claim.

Regarding the conversation between Mrs. Fox and her pharmacist about prescription drug
plans, the district court noted that Mrs. Fox testified that her pharmacist stated simply
that he did not “know what to tell her."

“There is no indication in this [statement] that the pharmacist did not ‘know’ what to tell
Mrs. Fox due to the Marketing Guidelines' prohibition on steering,” the court said.

Therefore, Mrs. Fox lacked standing because she did not establish that her pharmacist
would have been willing to direct her to a particular Part D plan but for the marketing
guidelines, the district court concluded.

As for Mrs. Samp’s conversations with her pharmacist, the district court noted that Mrs.
Samp testified that she had never asked the pharmacist whether to enroll in a Part D
plan, or for a recommendation to a particular Part D plan.

Mrs. Samp therefore lacked standing to bring a First Amendment claim based on CMS’
marketing guidelines because she failed to show “any injury in fact . . . traceable to the
challenged . . . guidelines,” the court said.

The district court next rejected plaintiffs’ argument that they had standing to bring their
First Amendment claim based on CMS’ nursing home policy because, though not currently
nursing home residents, a likelihood existed that they eventually would move into a
nursing home.

“The mere possibility that Plaintiff may someday live in a nursing home is speculative at
best,” the district court said. “They do not have standing to bring a First Amendment
claim based on [CMS’s] Nursing Home Policy unless and until they are in a nursing home
and the Policy affects them.”

Finally, the district court found the case was moot with regard to Mr. Samp. “Because Mr.
Samp is no longer living, there is not reasonable expectation that the alleged violation of
his First Amendment rights could be repeated,” the court said.

Fox v. Leavitt, No. 1:06-cv-01490-RMC (D.D.C. Aug. 25, 2008).

First Circuit Upholds HHS Secretary’s Exclusion Of Resident
Research Time From FTE Count
The First Circuit ruled November 17, 2008 that the Secretary’s decision to exclude
resident research time in a hospital's full-time equivalent (FTE) count for purposes of the
indirect medical education (IME) adjustment was a reasonable interpretation of the
ambiguous governing regulation.

The appeals court also held the Secretary’s interpretation was not at odds with the
applicable statutory language and congressional intent to increase payments to teaching
hospitals for teaching costs.

The case arose after Rhode Island Hospital (hospital), an acute care facility in Providence
with a large graduate medical education program, asked its fiscal intermediary to include
290 FTE residents in its calculation of the hospital’s IME adjustment.

The fiscal intermediary concluded that governing Medicare regulations precluded counting
research time in a hospital’s FTE count, and therefore reduced the hospital’s FTE total by
12.06, decreasing the hospital’s IME adjustment by roughly $1 million.

The Provider Reimbursement Review Board (PRRB) reversed, concluding the
administrative regulation governing a hospital’s FTE count was unambiguous and did not
exclude residents’ education research time. See 42 C.F.R. § 412.105(f)(1).

Reviewing the PRRB decision, the Secretary determined the Medicare IME payment was
only intended to reimburse teaching hospitals for increased patient care costs and that
residents performing education research were not assigned to an eligible area of the
hospital under Section 412.105(f)(1).

On appeal, a federal district court in Rhode Island concluded the Secretary had misread
the governing FTE regulation, or that the Secretary’s reading was unreasonable in light of
congressional intent in establishing the IME adjustment.

The First Circuit reversed.

The Secretary argued that residents assigned to perform education research, i.e.
research unrelated to patient care, are, by definition, not “assigned” to an “area” or
“portion of the hospital subject to the prospective payment system [PPS]” as
contemplated under Section 412.105(f)(1).

According to the Secretary, residents “assigned” to a research rotation, as here, are not
integrated into a unit of the hospital dedicated to patient care services reimbursable
under the PPS and therefore do not count toward a hospital’s FTE count.

The hospital, on the other hand, contended that, for purposes of the FTE count, the
nature of a resident’s work is immaterial, as long as the resident is assigned to an area of
the hospital not specifically excluded from PPS billing.

The appeals court concluded that both readings of the applicable regulation were
plausible, and therefore Section 412.105(f)(1) was ambiguous.

Affording deference to the Secretary’s reading, the appeals court held his interpretation
was not plainly erroneous or inconsistent with the regulatory language.

The appeals court rejected the hospital’s argument that under the Secretary’s
interpretation no resident would ever qualify as a full FTE because all residents must
participate in activities that are unrelated to patient care.

“What the hospital fails to mention is that a hospital’s Director of Graduate Medical
Education, not Medicare, is the party empowered with determining the ‘total time
necessary to fill a residency slot’ . . . . Presumable the director could limit this calculation
to the number of work hours required to fill a single resident position on a hospital’s
staffing calendar,” the appeals court observed.

Next, the appeals court determined the Secretary’s interpretation did not impermissibly
conflict with the relevant statutory language or congressional intent in enacting the IME
adjustment to increase Medicare payments to teaching hospitals.

The appeals court found no indication that Congress wanted to abrogate the Secretary’s
authority to regulate the proper calculation of a hospital’s ratio of FTE to beds in the IME

equation, nor that it “even considered the nuances involved in determining the FTE
eligibility of residents in teaching hospitals.”

Thus, the appeals court concluded the Secretary’s interpretation of the FTE regulation
was not “arbitrary, capricious, an abuse of discretion or otherwise not in accordance with

Rhode Island Hosp. v. Leavitt, No. 07-2673 (1st Cir. Nov. 17, 2008).

U.S. Court In California Finds Reasonable Secretary's
Disallowance Of Provider's Medicare Bad Debt
The U.S. District Court for the Southern District of California upheld November 24, 2008
the Department of Health and Human Services' (HHS') refusal to allow a provider's
Medicare bad debt.

In so holding, the court concluded the Secretary's findings that the provider did not
attempt to collect Medicare bad debt as vigorously as it attempted to collect non-
Medicare bad debt was reasonable and supported by the evidence in the record.

Plaintiff El Centro Regional Medical Center in 1999 and 2000 claimed reimbursement for
certain unpaid deductible and coinsurance obligations of Medicare beneficiaries. The
Administrator of the Centers for Medicare and Medicaid Services, acting on behalf of the
HHS Secretary, disallowed reimbursement of plaintiff’s Medicare bad debts, finding
plaintiff had not made "reasonable collection efforts" as required by Medicare regulations.

Plaintiff sought judicial review of the decision and the parties cross-moved for summary

Plaintiff argued the Secretary’s requirement that non-Medicare bad debts must be
returned from a collection agency along with Medicare bad debts in order for the provider
to obtain reimbursement for its Medicare bad debts was contrary to the law, regulations,
and Manual provisions that govern Medicare reimbursement.

The court noted 42 C.F.R. § 413.89(e) provides that bad debts may be reimbursed as
reasonable costs only if four criteria are met. Three of those criteria were at issue here,
the court said: "the provider must be able to establish that reasonable collection efforts
were made"; "the debt was actually uncollectible when claimed as worthless"; and "sound
business judgment established that there was no likelihood of recovery at any time in the

The court noted interpretive guidance provided in Section 310 of the Provider
Reimbursement Manual (PRM) specifically stated that "to be considered a reasonable
collection effort, a provider’s effort to collect Medicare deductible and coinsurance
amounts must be similar to the effort the provider puts forth to collect comparable
amounts from non-Medicare patients." PRM § 310.

Here, the Secretary concluded plaintiff’s efforts to recover amounts owed by Medicare
patients through an outside collection agency were "significantly less vigorous than its
efforts to collect comparable non-Medicare debts."

The court found it was "neither arbitrary and capricious nor contrary to Medicare law and
regulations for the Administrator to interpret PRM § 310 as being applicable to both in
house and outside collection efforts."

Regarding the Secretary's other findings, the court noted the "Administrator cited to
specific evidence from the record showing Plaintiff’s disparate treatment of Medicare and
non-Medicare debt collection efforts."

Thus, declining to "re-weigh the evidence," the court found the Secretary's decision was
supported by substantial evidence and granted the Secretary's motion for summary

El Centro Reg'l Med. Ctr. v. Leavitt, No. 07cv1182(PCL) (S.D. Cal. Nov. 24, 2008).

Eighth Circuit Holds Medicare May Recover Medical Expenses
From Third Party Settlement Proceeds
The Eighth Circuit held January 30, 2009 that Medicare has a right to recover medical
expenses it paid out on behalf of a now-deceased beneficiary from proceeds of a wrongful
death settlement.

After David Mathis died, plaintiffs filed a wrongful death suit against the parties they
believed were responsible for his fatal injuries. When the parties agreed to settle the
action, Medicare, which had paid $77,403.67 of Mathis' final medical expenses, claimed it
had a right to reimbursement from the settlement funds.

Plaintiffs then amended their petition to add a declaratory judgment claim against the
Secretary of the Department of Health and Human Services (HHS), arguing the Missouri
wrongful death statute did not provide for recovery of medical expenses and therefore
plaintiffs had no duty to reimburse Medicare.

After $77,403.67 was paid into the state court registry to be held pending resolution of
the declaratory judgment action, HHS removed the action to federal court. The district
court granted summary judgment to HHS and held the funds should be paid out to the
agency. Plaintiffs appealed.

The appeals court first observed that under federal law, if a third party is responsible for
injuring a qualified individual and Medicare pays for the resulting medical treatment, the
payment is considered conditional and repayment to Medicare is required if the
responsible party's liability insurer later makes a payment for those expenses. See 42
U.S.C. § 1395y(b)(2)(B)(i).

In addition, the appeals court noted, Medicare may seek reimbursement from "any
entity" that receives such a payment. See 42 U.S.C. § 1395y(b)(2)(B)(iii).

The appeals court rejected plaintiffs' argument that the decedent's medical
expenses were not damages recoverable in a state wrongful death action.

In so holding, the appeals court said plaintiffs' reliance on Finney v. National Healthcare
Corp., 193 S.W.3d 393, 395 (Mo. Ct. App. 2006), which held that damages recoverable
under the Missouri wrongful death statute are not the same as the damages that a
decedent would have been entitled to recover in a personal injury action, was misplaced.

"Finney simply held that there were damages available in a wrongful death action that
the decedent, had he lived, could not have recovered in a personal injury action, such as
damages for loss of consortium," the appeals court explained. "That holding indicates
that the damages recoverable in the two actions are different, but it is manifestly not a
holding that they are mutually exclusive."

The appeals court further pointed out that the Missouri Supreme Court has said
"damages incurred by the decedent before death, such as medical expenses and pain and
suffering, are recoverable as part of the wrongful death claim," Powell v. American
Motors Corp., 834 S.W.2d 184 (Mo. 1992).

The appeals court also rejected plaintiffs' reliance on a case that involved a hospital lien
on settlement proceeds. According to the appeals court, a hospital lien attaches only to
proceeds of claims "brought on the part of the injured person," whereas Congress
authorized Medicare to recover from "any entity" that receives payment for expenses
conditionally paid for by Medicare.

Mathis v. Leavitt, No. 08-1983 (8th Cir. Jan. 30, 2009).

U.S. Court In D.C. Upholds Cost Containment Reductions To
Medicare Reimbursement Of Hospital Ambulance Services
The U.S. District Court for the District of Columbia upheld March 17, 2009 the
Department of Health and Human Services Secretary’s calculation of Medicare
reimbursement for ambulance services provided by two hospitals that included across-
the-board cost reductions applicable to outpatient services.

Applying Chevron deference to the Secretary’s decision, the court found the relevant
statutory language plainly indicated Congress considered ambulance services as a type of
hospital outpatient service.

As hospital outpatient services, the court continued, the 5.8% and 10% across-the-board
cost reduction factors enacted by Congress as part of the Balanced Budget Act of 1997
(BBA) clearly applied to ambulance services.

Finally, the court said, the Secretary’s decision to apply these cost reduction factors to
the base year costs used to calculate reimbursement for the hospitals’ ambulance
services was a reasonable interpretation of the Medicare statute.

Decatur County General Hospital and North Memorial Health Care initiated the action
after the Centers for Medicare and Medicaid Services (CMS) Administrator found the
hospitals’ fiscal intermediaries correctly calculated their Medicare reimbursement for
ambulance services provided in fiscal years 2000 and 2001.

As a way to reduce escalating costs, Congress mandated in the BBA an across-the-board
reduction in all payments for outpatient hospital services—10% for capital-related costs
and 5.8% for all other services.

The Provider Reimbursement Review Board (PRRB) concluded the ambulance services
were outpatient hospital services, but that the 5.8% and 10% reductions should not be
applied to the base year costs used to determine Medicare reimbursement of ambulance
services before the fee schedule went into effect.

The CMS Administrator reversed, however, concluding the application of the reductions to
the cost per trip base year was consistent with the statutory language and congressional
concerns about rising costs of outpatient and ambulance services.

The federal district court agreed that ambulance services are hospital outpatient services
under the relevant statutory language.

The fact that Congress excluded ambulance services from the outpatient prospective
payment system (OPPS) is consistent with this conclusion, the court said. Congress
instead established a separate fee schedule for ambulance services.

The inclusion of a special payment rule for ambulance services within a subsection related
to the hospital OPPS would not make sense if ambulance services were not considered
hospital outpatient services, the court observed.

The court likewise found the plain language of the Medicare Act called for applying the
cost reduction factors to ambulance services. The language states, without qualification,
that the reduction factors apply to “outpatient hospital services,” with only two carve-
outs—payments to sole community hospitals or to critical access hospitals.

Finally, the court held the Secretary’s decision to apply the cost reduction factors to the
base year costs was a reasonable interpretation of the statute.

Before the ambulance fee schedule was implemented, the BBA established a cost per trip
limit based on reasonable costs for the previous fiscal year (i.e. base year costs).

The Secretary determined the costs “recognized as reasonable” in the base year should
reflect the further cost containment measures (i.e. the 10% and 5.8% reductions) in
accordance with congressional concerns regarding escalating costs of outpatient and
ambulance services.

The court found this interpretation was not arbitrary, capricious, or an abuse of discretion
under the Administrative Procedure Act, but a permissible construction of the statute.

Decatur County Gen. Hosp. v. North Mem’l Health Care, No. 07-1544(JDB) (D.D.C. Mar.
17, 2009).

U.S. Court In California Refuses To Dissolve Preliminary
Injunction Blocking Clinical Lab Competitive Bidding Demo
The U.S. District Court for the Southern District of California denied March 25, 2009 the
government’s motion to dissolve a preliminary injunction imposed a year ago that
enjoined the Department of Health and Human Services (HHS) from moving ahead with a
competitive bidding demonstration for clinical laboratory services provided under
Medicare Part B.

The court granted the government’s motion to dismiss the case as moot given that
Congress in July 2008 repealed HHS’ authority for the demo project as part of the
Medicare Improvements for Patients and Providers Act.

At the same time, the court agreed with plaintiffs Sharp Healthcare, Scripps Health, and
Internist Laboratory that one important controversy potentially still existed between the
parties—i.e., the government’s retention of confidential bid information that was obtained
before the preliminary injunction was entered.

In the preliminary injunction, issued April 8, 2008, three days before HHS was slated to
select winners of the Medicare demo project, the court specifically protected from
disclosure any data included in the bid applications.

Despite the repeal of the competitive bidding demo, the government has retained
possession of the bidding applications, the court observed.

“Plaintiffs persuasively contend that they will be harmed if Defendant decides to use the
confidential information obtained during the bidding process prior to the statute’s repeal,”
the court wrote.

Specifically, according to the opinion, plaintiffs are concerned the government could use
the confidential and proprietary data in the bid applications to set Medicare
reimbursement rates for laboratory services, essentially achieving the underlying goal of
the demo.

Plaintiffs asked to amend their complaint to add a specific claim related to the HHS
Secretary’s retention of the bid information.

The court agreed, dismissing the case with leave to amend to allow plaintiffs to plead the
additional claim.

In so holding, the court found dissolving the preliminary injunction and vacating its prior
orders “would suddenly give Defendants the discretion to attempt another use of the

The court said the government made persuasive arguments that the data at issue already
was protected under the Trade Secrets Act and that the Secretary could only make rate
changes through notice and comment rulemaking.

But the court questioned why HHS “vehemently insists on maintaining possession of the

In an October 17, 2007 Federal Register notice (72 Fed. Reg. 58856), HHS announced
the San Diego-Carlsbad-San Marcos metropolitan area as the first of two locations for the
three-year demo, which was mandated by the Medicare Modernization Act of 2003.

The demo was aimed at determining whether competitive bidding could be used to
provide laboratory tests under Part B at fees below current payment rates without
compromising quality and access to care.

Plaintiffs alleged the HHS Secretary violated notice and comment requirements of the
Administrative Procedure Act (APA) in developing certain demonstration project rules;
that several of the rules violated the APA because they are arbitrary, capricious, an abuse
of discretion or not otherwise in accordance with the law; that the rules cause a taking in
violation of the Fifth Amendment; and that the rules violate the applicable statute by
expanding the demo beyond laboratory tests to include the collecting and handling of

In considering whether to grant the preliminary injunction, the court found plaintiffs had
demonstrated the possibility of irreparable harm, both in terms of direct economic injury
and an adverse effect on patient care.

Sharp Healthcare v. Leavitt, No. 08-CV-0170 W (S.D. Cal. Mar. 25, 2008).

U.S. Court In West Virginia Says Medicare May Recover Funds
Spent On Beneficiary’s Care From Third-Party Settlement Proceeds
In Attorney's Possession
The Centers for Medicare and Medicaid Services (CMS) is entitled as a matter of law to
recover funds it spent on the care of a Medicare beneficiary from the third-party

settlement proceeds he received in compensation for his injuries, the U.S. District Court
for the Northern District of West Virginia held March 26, 2009.

The court found the beneficiary’s attorney—who was sued by CMS—was personally liable
to Medicare for the recovery amount because he received part of the funds from the

Attorney Paul J. Harris was retained by a Medicare beneficiary who had sustained injuries
in a fall from a ladder to sue the ladder retailer.

As part of that settlement, the beneficiary and Harris received a sum of $25,000.

Harris forwarded to Medicare details of the settlement payment, and based upon the
information provided by Harris, Medicare calculated that it was owed approximately
$10,253.59 out of the $ 25,000 settlement for payment it made for the beneficiary’s

CMS informed Harris of this decision by letter. Harris never appealed and neither he nor
his client ever paid CMS.

CMS sued Harris in federal court for a declaratory judgment and money damages and
then moved for summary judgment.

The court first noted that under the Medicare Secondary Payer Statute (MSPS), when
Medicare makes a conditional payment for medical services received as a result of an
injury caused by another party, the government has a right of recovery for the
conditional payment amount against any entity responsible for making the primary

Here, the government argued it was entitled to summary judgment because Harris
waived any challenge to the amount or existence of the debt at issue since the time for
administratively appealing that determination had passed.

The court agreed, finding CMS was entitled to judgment as a matter of law.

Further, Harris was individually liable for reimbursing Medicare because the
government could recover "from any entity that has received payment from a primary
plan," including an attorney, the court explained.

The court also agreed with the government’s argument that Harris' failure to pursue
available administrative remedies precluded him from challenging CMS' reimbursement

Accordingly, the court awarded the government its requested reimbursement amount
plus interest.

United States v. Harris, No. 5:08CV102 (N.D. W.Va. Mar. 26, 2009).

U.S. Court In D.C. Says Disallowance Of Nursing Home’s “Bad
Debt” Claims Was Arbitrary And Capricious
The Department of Health and Human Services Secretary’s decision to deny 120-bed
nursing facility Summer Hill Nursing Home LLC (Summer Hill) Medicare reimbursement of

“bad debt” it incurred for certain dual-eligible patients was arbitrary and capricious, the
U.S. District Court for the District of Columbia ruled March 25, 2009.

The Secretary based the decision on the agency’s “must bill” policy, which requires
providers to submit evidence that they have billed state Medicaid programs for
uncollectable deductible and co-insurance obligations and received a refusal to pay.

But the court found the Secretary had ignored an undisputed fact—Summer Hill had billed
and received “remittance advices” from the New Jersey Medicaid program refusing to pay
the debts associated with certain “dual eligible” patients.

Although Summer Hill received the remittance advices after it initially filed a claim with
Medicare for bad debt reimbursement, the court found no rationale for disallowing the
claim on that basis.

Thus, the Secretary’s decision was “arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with the law” in violation of the Administrative Procedure

At issue was $170,537 in “bad debts” New Jersey nursing facility Summer Hill submitted
to its fiscal intermediary for the fiscal year ending December 31, 2004. The intermediary
disallowed most of this amount because Summer Hill wrote off the dual-eligible bad debt
before billing New Jersey’s Medicaid program.

Before filing an appeal of the disallowance, Summer Hill billed New Jersey Medicaid and
received the required remittance advices refusing to pay the debts.

The Provider Reimbursement Review Board (PRRB) reversed the intermediary’s
disallowance but not on the basis of the subsequent receipt of the remittance advices.
Instead, the PRRB found the agency had insufficient authority to enforce the “must bill”

The Secretary reversed the PRRB, finding “[t]he bad debts claimed by the Provider were
not worthless when written off” because Summer Hill failed to bill the state Medicaid
program and obtain the necessary remittance advices.

The court found the Secretary had no basis for disregarding the undisputed fact that
Summer Hill now had the appropriate remittance advices in hand. The court declined to
rule on the validity of the “must bill” policy.

Summer Hill Nursing Home LLC v. Johnson, No. 08-268 (D.D.C. Mar. 25, 2009).

D.C. Circuit Says Physician Medicare Claims Data Exempt From
FOIA Disclosure Request
The Department of Health and Human Services (HHS) was not required to disclose
certain Medicare claims data for physicians pursuant to a Freedom of Information Act
(FOIA) request, the District of Columbia Circuit held January 30, 2009 in a 2-1 opinion.

The appeals court said physicians have a substantial privacy interest in Medicare claims
data, which, in connection with the publicly available fee schedule, could be used
to calculate the total Medicare payments made to a particular physician.

Absent a significant public interest, which the requestor Consumers' Checkbook, Center
for the Study of Services (CSS) failed to show, disclosure of the requested data “would
constitute a clearly unwarranted invasion of personal privacy.”

The American Medical Association (AMA) heralded the ruling as a "major victory" for
physicians' privacy.

“The court found that physicians have a significant right to privacy, and there is no public
interest in the disclosure sought by Consumers’ Checkbook. The court clearly found that
the release of personal physician payment data does not meet the standard of the
Freedom of Information Act, which is to provide the public with information on how the
government operates," AMA said in a statement.

CSS submitted a FOIA request to the Centers for Medicare and Medicaid Services (CMS)
seeking records for all Medicare claims submitted to the agency by physicians in the
District of Columbia, Illinois, Maryland, Washington, and Virginia. The request did not
encompass patient identities.

Specifically, CSS sought data elements including the diagnosis, the type and place of
service, and the Unique Physician Identifying Number of the Medicare claims submitted
by physicians in these localities during 2004.

CMS denied the FOIA request. CSS eventually filed an appeal in federal district court
seeking injunctive relief. The court granted summary judgment in CSS’ favor.

HHS argued the requested records were exempt from disclosure under FOIA Exemption
6, which provides that FOIA “does not apply to matters that are . . . personnel and
medical files and similar files the disclosure of which would constitute a clearly
unwarranted invasion of personal privacy.”

The D.C. Circuit found the requested records were exempt from disclosure under FOIA.

The appeals court noted the information at issue clearly fell into the category of material
covered by Exemption 6, prompting it to consider whether a disclosure would
compromise a substantial, rather than de minimis, privacy interest.

Finding that it would, the appeals court said physicians have a “substantial privacy
interest in the total payments they receive from Medicare for covered services.”

CSS countered that disclosure of the requested records would serve the public interest by
(1) revealing information about HHS’ performance in maintaining and enhancing the
quality and efficiency of Medicare services; (2) the agency’s ability to root out fraud and
waste; and (3) the agency’s compliance with various transparency initiatives.

As to the first basis CSS cited, the appeals court did not view the material requested as
helpful in assessing whether CMS/HHS was fulfilling their statutory requirements to
undertake specific quality-promoting programs.

The appeals court likewise rejected CSS’ second basis absent any evidence the requested
data would reveal potential fraud.

“[I]f an unsupported suggestion that an agency may be distributing federal funds to a
fraudulent claimant justifies disclosure of private information, the agency would have no
defense against FOIA requests for release of private information,” the appeals court

Finally, the appeals court held the requested data would not assist the public in
determining whether CMS was complying with its transparency initiatives to provide
consumers with more information about service providers.

While CMS has undertaken certain transparency initiatives, “at no point has it pledged, or
been directed by the Congress, to disclose any information to the public that could
possibly assist consumers in health care decisions without regard to any countervailing
interest, including the FOIA-recognized privacy interest,” the appeals court said.

Given these findings, the appeals court said it need not engage in any balancing of “non-
existent” public interests with “every physician’s substantial privacy interest in the
Medicare payments he receives.”

A dissenting/concurring opinion disagreed with the majority’s analysis of the public
interest issue, finding disclosure of the requested information could shed light on HHS
efforts to measure and improve healthcare quality and to combat fraud and abuse.

The dissent also viewed physicians' privacy interest in the data at issue as much more
limited given that it pertained to the receipt of government funds and would not reveal an
individual’s take-home earnings.

Although the dissent concluded FOIA Exemption 6 would not bar release of the requested
data, it did find merit to HHS' alternative argument that an injunction issued by the U.S.
District Court for the Middle District of Florida (an argument not reached by the majority)
was implicated.

In Florida Med. Ass’n v. Department of Health, Education and Welfare, 479 F. Supp. 1291
(M.D. Fla. 1979), the court enjoined HHS from disclosing any list of annual Medicare
reimbursement amounts that would individually identify members of a recertified class of

Thus, the dissent/concurrence would remand to the district court to determine the scope
of that injunction.

Consumers’ Checkbook v. Department of Health and Human Servs., No. 07-5343 (D.C.
Cir. Jan. 30, 2009).

U.S. Court In Georgia Says Ambulance Provider Properly
Reimbursed Under “Reasonable Charge” Methodology In Dispute
Over Fee Schedule
An ambulance provider was properly reimbursed by Medicare under a “reasonable
charge” methodology for services even though the statutory effective date to establish a
national fee schedule had passed, a federal court in Georgia ruled March 30, 2009.

Thus, the U.S. District Court for the Middle District of Georgia upheld the Department of
Health and Human Services (HHS) Secretary’s final decision that the provider was not
entitled to a retroactive adjustment of its Medicare reimbursement under the fee
schedule before federal regulations were in place.

The long-running dispute was initiated by various ambulance companies, including
Lifestar Ambulance Service, Inc. (Lifestar), in several states that provide ambulance
services to Medicare beneficiaries.

Plaintiffs initially sought injunctive relief in the form of a writ of mandamus to compel
HHS to comply with the requirement in the Balanced Budget Act of 1997 (BBA) that it
establish a national fee schedule for ambulance services by the statutory deadline of
January 1, 2000, which it had failed to do.

HHS instead issued final regulations and applied the new fee schedule only to services
rendered on or after April 1, 2002. Plaintiffs said they were entitled to higher payments
under the revised fee schedule from January 1, 2000 to March 31, 2002, instead of being
paid under the previous “reasonable charge” methodology.

The district court issued the writ directing HHS to implement the fee schedule for the
disputed time period. But the Eleventh Circuit reversed, concluding the companies had
other relief available to them under the Medicare statute and therefore had to first
exhaust administrative remedies. Lifestar Ambulance Serv., Inc. v. United States, 365
F.3d 1293 (11th Cir. 2004) (Lifestar II).

The court agreed to consider Lifestar’s claims because it had obtained a final agency
decision, but dismissed the other providers’ claims for failing to exhaust administrative

HHS then moved for summary judgment on Lifestar’s action. The court granted the
motion, finding Lifestar was not entitled to relief.

The court noted that because Lifestar II required plaintiff to channel its claim through the
administrative process, it must review the action in light of the standards governing
administrative appeals, rather than those governing mandamus jurisdiction.

Applying a Chevron analysis to the instant case, the court upheld the
agency's interpretation of the BBA.

Although the BBA provided that the new fee schedule “shall apply to services furnished
on or after January 1, 2000,” the court found the statute was ambiguous as to
whether the agency was required to promulgate fee schedule regulations by that date.

Moreover, the court said the BBA did not speak directly to whether the fee schedule
regulations must apply retroactively to services provided after January 1, 2000 but before
the fee schedule regulations were promulgated.

“Courts have held . . . that a statutory effective date standing alone is insufficient
evidence that Congress intended retroactive application of a regulation,” the opinion said.

Thus, the court went on to consider the next prong of Chevron—i.e., whether the
agency’s interpretation of the BBA was reasonable.

Finding that it was, the court noted the agency’s interpretation permitted it to comply
with other provisions of the BBA, including budget neutrality and the duty to phase in
application of the payment rates in a fair and efficient manner, as well as comported with
the general presumption against retroactive application of regulations.

Lifestar Ambulance Serv., Inc. v. United States, No. 4:07-CV-89 (D. Ga. Mar. 30, 2009).

U.S. Court In Mississippi Upholds Secretary’s Decision To Apply
“Blend Rate” For Reimbursing Hospital Outpatient Services
The Department of Health and Human Service’s (HHS') decision to apply a “blend rate” to
hospital outpatient services after its statutory sunset but before the agency had
promulgated a new prospective payment system (PPS) was not arbitrary and capricious,
a federal court in Mississippi ruled recently.

Under the Balanced Budget Act of 1997 (BBA), Congress established a PPS for outpatient
services to go into effect on January 1, 1999.

Before the BBA, Congress had signaled a move toward an outpatient PPS by creating a
“blend rate,” a hybrid between the previously used reasonable cost reimbursement and a
PPS for outpatient surgical, radiological, and other diagnostic procedures.

The blend rate was set to expire when the new PPS went into effect on January 1, 1999.
HHS failed, however, to promulgate regulations establishing an outpatient PPS by that
date. Instead, the outpatient PPS did not take effect until August 2000.

During this interim period, the Secretary decided to continue paying hospitals for
outpatient services using the “blend rate.”

Plaintiff hospitals sued the Secretary arguing they should have been reimbursed under
the reasonable cost rate for outpatient surgical, radiological, and other diagnostic
procedures in 1999 and 2000.

The U.S. District Court for the Southern District of Mississippi disagreed, holding the
Secretary properly applied the “blend rate” during this interim period before the PPS was
in place.

The court employed the two-prong Chevron analysis, concluding first that Congress did
not speak to the precise issue in dispute—i.e., the applicable reimbursement rate for
outpatient services performed after January 1, 1999 but before the Secretary
implemented the PPS.

Next, under the second Chevron step, the court held the Secretary’s decision to apply the
blend rate during this time period was “based on a permissible construction of the

“[T]he sunset provisions were merely conforming amendments demonstrating Congress’s
intent to discontinue the blend rate when the PPS became effective.”

The court said it would make little sense to revert back to the reimbursement rate based
on reasonable cost that Congress had specifically “abandoned a decade earlier in an
effort to reduce costs.”

Southwest Miss. Reg’l Med. Ctr. v. Leavitt, No. 3:08cv263 DPJ-JCS (S.D. Miss. Apr. 15,

Regulatory Developments

Independent Labs May No Longer Bill Medicare For TC Of
Pathology Services Furnished To Hospital Patients, CMS Says
The Centers for Medicare and Medicaid Services (CMS) issued Transmittal 357 July 7,
2008 reminding Medicare Fiscal Intermediaries (FIs) and Carriers and Medicare
Administrative Contractors (MACs) of the expiration of the moratorium that allowed
independent laboratories to bill for the technical component (TC) of physician pathology
services furnished to hospital patients.

In the transmittal, CMS instructs FIs, carriers, and MACs “to conduct provider education
activities to notify independent laboratories that those that qualify to bill under the
aforementioned provisions may no longer bill the carrier for the TC of physician pathology
services furnished to patients of a covered hospital, regardless of the beneficiary's
hospitalization status (inpatient or outpatient) on the date that the service was performed
effective with Date of Service on or after July 1, 2008.”

In the final physician fee schedule regulation published in the Federal Register on
November 2, 1999, CMS stated that it would implement a policy to pay only the hospital
for the TC of physician pathology services furnished to hospital patients

At the request of the industry to allow independent laboratories and hospitals sufficient
time to negotiate arrangements, various statutory and administrative actions delayed the
policy change proposed in the regulation, CMS explained.

The moratorium on the rule’s implementation was further extended in the Medicare,
Medicaid, and SCHIP Extension Act by another six months through June 30, 2008.

Therefore, during this time, carriers have continued to pay for the TC of physician
pathology services when an independent laboratory furnishes this service to an inpatient
or outpatient of a covered hospital.

That provision, however, has now sunset and independent laboratories may no longer bill
for the TC of physician pathology services furnished to patients of a covered hospital,
CMS said.

CMS Issues IPPS Rule Containing Payment Provisions Aimed At
Reducing “Never Events”
In an acute care inpatient prospective payment system (IPPS) final rule issued July 31,
2008 by the Centers for Medicare and Medicaid Services (CMS), the agency took several
steps to improve the quality of care provided in hospitals.

As part of these quality of care incentives, the rule includes payment provisions to reduce
so-called “never events” that occur in hospitals, CMS said in a press release.

CMS also sent a letter to state Medicaid directors providing information about how states
can adopt the same never events practices and encouraging states to adopt the same
non-payment policies outlined in the final rule.

CMS also announced the opening of a process to develop National Coverage
Determinations (NCDs) addressing three never events: surgery on the wrong body part,
surgery on the wrong patient, and wrong surgery performed on a patient.

“Evaluating coverage of these procedures is yet another important step for Medicare in
addressing concerns regarding never events,” the release said.

The rule finalizes three conditions that, if acquired during a hospital stay, Medicare will no
longer pay the additional cost of the hospitalization.

The three conditions that were identified in the final rule are: surgical site infections
following certain elective procedures, including certain orthopedic surgeries, and bariatric
surgery for obesity; certain manifestations of poor control of blood sugar levels; and deep
vein thrombosis or pulmonary embolism following total knee replacement and hip
replacement procedures.

In addition, the final rule expands requirements for hospital quality reporting. CMS added
13 new quality measures, bringing the total number of measures for reporting in 2009 to
42. Currently, hospitals are required to report 30 quality measures on their claims for
Medicare inpatient services to qualify for a full update to their FY 2009 payment rates.

Overall, the final rule is estimated to increase Medicare payments to acute care hospitals
by nearly $4.75 billion.

CMS Final Payment Rule Aims To Improve Quality Of Care In
Hospital Outpatient Departments
The Centers for Medicare and Medicaid Services (CMS) issued a final rule October 30,
2008 establishing Medicare payment and policy changes for services in hospital
outpatient departments (HOPDs) and ambulatory surgical centers (ASCs) for calendar
year (CY) 2009.

The Outpatient Prospective Payment System/Ambulatory Surgical Center Payment
System (OPPS/ASC) final rule includes a 3.6% annual inflation update for HOPDs, but
sets the ASC update for CY 2009 at 0%.

CMS projects that the final CY 2009 payment rates under the OPPS will result in a 3.9%
increase in Medicare payments for providers paid under the OPPS.

Moreover, the agency projects that hospitals will receive $30.1 billion in CY 2009 for
outpatient services furnished to Medicare beneficiaries, up from $28.5 billion in projected
payments for CY 2008, and expects to make payments of almost $3.9 billion in CY 2009
to ASCs compared with $3.5 billion projected for CY 2008.

According to CMS, it will develop and implement a policy to not pay hospitals for care
related to illness or injuries acquired by a patient during a hospital outpatient encounter.
"Such a policy, which we expect to propose in the future, would be known as hospital
outpatient healthcare-associated conditions (HOP-HACs), and it would make adjustments
to OPPS payments to ensure equitable and appropriate payment for care, similar to the
quality adjustments applied to payment for hospital-acquired conditions in the inpatient
setting," CMS said in a press release announcing the rule.

In response to comments submitted on the proposed rule, which was published in the
August 31, 2007 Federal Register, new conditions of coverage now define an ASC as "a
distinct entity that operates exclusively for the purpose of providing surgical services to
patients not requiring hospitalization and in which the expected duration of services
would not exceed 24 hours following an admission."

This is a departure from the proposed rule, which would have provided that the patient’s
treatment was not expected to require an overnight stay, defined as requiring active
monitoring by qualified medical personnel, regardless of whether it is provided in the
ASC, after 11:59 p.m. on the day of admission.

Aiming to strengthen ties between payment and quality, the final rule adopts four new
quality measures for imaging efficiency, increasing the number of quality measures that
HOPDs must report in CY 2009 to receive the full update from the current seven
measures to 11. The annual OPPS payment inflation update will be reduced by 2
percentage points for hospitals that do not meet quality reporting requirements.

The final rule also makes changes to how CMS pays for imaging services when two or
more imaging procedures from an imaging family are provided in one session in order to
encourage greater imaging efficiency.

Final Rule Increases SNF Payment Rates, Delays Recalibration Of
Under a Centers for Medicare and Medicaid Services (CMS) final rule issued July 31, 2008
Medicare payment rates to nursing homes will increase by $780 million in fiscal year (FY)
2009 due to a 3.4% increase in the annual market basket calculation of the cost of goods
and services included in a skilled nursing facility (SNF) stay.

The SNF Prospective Payment System (PPS) uses a case-mix classification known as
Resource Utilization Groups (RUGs) to help determine a daily payment rate.

A recalibration of the RUGs, which had been proposed for FY 2009, “has been delayed
while CMS continues to evaluate the data,” the agency said in a press release.

“[I]n view of the widespread industry concern that a recalibration could potentially have
adverse effects on beneficiaries, clinical staff, and the quality of SNF care, we will
continue to evaluate the underlying data carefully as we consider implementing an
adjustment in the future,” CMS Acting Administrator Kerry Weems explained.

CMS Postpones 2009 Competitive Acquisition Program For
Certain Physician-Administered Drugs
The Centers for Medicare and Medicaid Services (CMS) announced September 10, 2008
that it was postponing the 2009 Competitive Acquisition Program (CAP) for certain
Medicare Part B drugs and biologics administered in physicians’ offices.

The Medicare Modernization Act of 2003 mandated the program, which gave physicians
who administer certain drugs in their offices to Medicare beneficiaries the option of
obtaining them from a single, competitively selected vendor that would then bill Medicare
Part B.

Physicians who elected to participate in the CAP, instead of purchasing the office-
administered drugs from distributors and then being reimbursed by Medicare, no longer
had to collect coinsurance and deductibles from beneficiaries for these drugs.

CMS said it received several qualified bids for the 2009-2011 CAP, but “contractual issues
with the successful bidders resulted in CMS postponing the 2009 program.” CMS said the
existing program will continue through December 31, 2008.

After that date, “CAP physician election for participation in the CAP in 2009 will not be
held and CAP drugs will not be available from an approved CAP vendor," CMS said.

CMS indicated it would provide additional guidance for participating CAP physicians on
how to transition out of the program.

The agency also is interested in feedback from physicians, potential vendors, and other
interested parties before proceeding with another bid solicitation. Among the areas CMS
is specifically interested in are the categories of drugs provided under the CAP, the
distribution of areas that are served by the CAP, and procedural changes that may
increase the program’s flexibility and appeal to potential vendors and physicians.

CMS Issues Final Medicare Physician Fee Schedule With 1.1%
Bump, Potential For Additional Payment Incentives
The Centers for Medicare and Medicaid Services (CMS) issued a final rule October 30,
2008 that provides a statutorily mandated 1.1% update in the Medicare physician fee
schedule for calendar year (CY) 2009, with the potential for an additional 4% in payment
incentives for adopting electronic prescribing (e-prescribing) and reporting on certain
quality measures.

The final rule, which is effective January 1, 2009, implements the 1.1% positive update
to the fee schedule that was required by the Medicare Improvements for Patients and
Providers Act of 2008 (MIPPA), which Congress passed this summer to avoid the negative
5.4% cut that was otherwise called for under the existing statutory formula.

CMS expects total Medicare spending under the fee schedule of roughly $61.9 billion to
980,000 physicians and non-physician practitioners (NPPs), up 4% from the $59.5 billion
projected for 2008.

The 2009 fee schedule allows physicians who adopt and use qualified e-prescribing
systems to transmit prescriptions to pharmacies to earn an incentive payment of 2.0% of
their total Medicare allowed charges during the year, CMS said.

CMS has noted that e-prescribing could eliminate certain medication errors and reduce
beneficiaries’ out-of-pocket costs.

The final rule also includes several improvements to the Physician Quality Reporting
Initiative, under which eligible professionals who satisfactorily report certain quality data
can receive a 2.0% incentive payment.

The final rule adds 52 new quality measures, bringing the total number of measures to
153 for 2009.

In addition, the final rule contains a number of other important changes in enrollment
and billing requirements for physicians and NPPs, as well as other changes mandated by
the MIPPA.

According to a CMS fact sheet, the agency opted not to finalize a provision in the
proposed rule that would have created a targeted exception to the physician self-referral
law to allow certain types of incentive payments or “shared savings programs.”

“After reviewing comments, CMS has concluded that it needs additional information in
order to finalize an exception that will allow the full array of beneficial, nonabusive

incentive payment and shared savings programs, such as pay-for-performance and other
quality-focused programs,” the fact sheet said.

CMS said it will reopen the comment period on this item for 90 days from the final rule’s
publication in the Federal Register to request further input from stakeholders.

The final rule also includes revisions to the anti-markup provision in 42 C.F.R. § 414.50.
In the proposed rule for the CY 2009 Medicare physician fee schedule, CMS proposed that
the anti-markup provisions would apply in all cases where the technical component or the
professional component of a diagnostic testing service is either: (i) purchased from an
outside supplier; or (ii) performed or supervised by a physician who does not share a
practice with the billing physician or other supplier.

CMS proposed two alternative approaches to determine whether the performing or
supervising physician “shares a practice” with the billing physician or other supplier and
solicited comments regarding other possible approaches to address concerns about

In the final rule, CMS said it was adopting a “flexible approach that incorporates both
proposed alternatives.”

“We believe that allowing billing physicians and other suppliers that cannot satisfy
Alternative 1 to comply with the requirements of Alternative 2 on a case-by-case basis
affords physicians flexibility while addressing our concerns regarding the ordering of
unnecessary diagnostic tests,” according to the final rule.

CMS opted not to move forward at this time with another proposal to apply most of the
performance standards for independent diagnostic testing facilities (IDTF) in 42 C.F.R. §
410.33 to physicians and NPPs who furnish diagnostic testing services for Medicare

“With the enactment of section 135 of the MIPPA legislation [which requires the agency to
establish an accreditation process for entities furnishing advanced diagnostic testing
procedures] and after reviewing public comments, we are deferring the implementation
of these proposals while we continue to review the public comments received on this
provision and we will consider finalizing this provision in a future rulemaking effort if we
deem it necessary,” according to the final rule.

Thus, CMS said it was not adopting its proposal to require physicians and NPPs to meet
those quality and performance standards when providing diagnostic testing services,
except mammography services, within their medical practice setting.

CMS Clarifies Definition Of "Negotiated Prices" Under Part D
Medicare Part D beneficiaries will pay lower prices at the pharmacy beginning January 1,
2010 under a final rule issued by the Centers for Medicare and Medicaid Services (CMS).

The rule, issued January 6, 2009, revises the definition of "negotiated prices" under Part
D by requiring drug plan sponsors to use the amount paid to a pharmacy as the basis for
determining cost sharing for beneficiaries and for reporting a plan’s drug costs to CMS,
the agency said in a press release.

"Negotiated prices" are the costs for prescription drugs agreed upon through direct
negotiation between the Part D sponsor or an intermediary contracting organization, such

as a pharmacy benefit manager (PBM), and the pharmaceutical manufacturer, the agency

Under current law, Part D sponsors that contract with a PBM report to CMS the amount
paid to the PBM (the lock-in price) or the amount the PBM paid to the pharmacy (the
pass-through price).

After the new rule takes effect, plans may continue to use the lock-in model with their
PBMs, CMS said, but they must report to the agency the price actually paid to the
pharmacy as the negotiated price.

"For patients whose plan used the lock-in model, this regulation will reduce what they
pay at the pharmacy counter because their copayment will no longer be based on a
higher negotiated price," CMS Acting Administrator Kerry Weems said. "The current lock-
in approach also moves beneficiaries through the Part D benefit more quickly, bringing
them to the ‘coverage gap’ sooner than under the pass-through pricing model."

The final rule also contains provisions related to the Retiree Drug Subsidy (RDS)
program, special needs plans, and Medicare Advantage, among other things.

CMS Delays Again Final Rule On Medicare Claims Appeals
The Centers for Medicare and Medicaid Services (CMS) announced February 27, 2009 an
additional extension of the timeline for publication of a March 2005 interim final rule on
changes to Medicare claims appeal procedures.

CMS stated in a Federal Register notice (74 Fed. Reg. 8867) that it could not meet the
timeline for publication of the final rule “due to the need to allow an opportunity for full
consideration of issues of law and policy raised in the regulation.”

In addition, CMS said it believes a delay is appropriate “in order to afford the President’s
appointees and designees an opportunity to further review and consider the laws and
policies that will be set forth in the final rule.”

Accordingly, the notice delays the new timeline for publication of the final rule until March
1, 2010.

The publication of the final rule has already been once delayed. On February 29, 2008,
CMS published a notice (73 Fed. Reg. 11043) extending the timeline for publication of the
interim final rule one year until March 1, 2009.

CMS stated in the current notice that Section 1871(a)(3)(C) of the Social Security Act
allows an interim final rule to remain in effect after the expiration of the regular timeline,
if at the end of each succeeding one-year extension to the regular timeline, the Secretary
publishes in the Federal Register a notice of continuation and explains why the regular
timeline or any subsequent extension was not complied with prior to the expiration of the

The interim final rule, published in March 2005 (70 Fed. Reg. 11420), will remain in effect
until March 1, 2010 unless a final rule is issued before then, the notice said.

Medicare Payments To Hospices Projected To Decrease 1.1% In
FY 2010 With Phase-Out Of Temporary Adjustment
The Centers for Medicare and Medicaid Services (CMS) issued April 21, 2009 a proposed
rule to update the Medicare Hospice Wage Index for fiscal year (FY) 2010.

Under the proposed rule, published in the April 24, 2009 Federal Register (74 Fed. Reg.
18912), Medicare payments to hospices are expected to decline roughly 1.1% in FY 2010
to about $30 billion, according to a CMS fact sheet.

The decrease, CMS said, is the net result of a 3.2% reduction in payments due to the
phase-out of a temporary adjustment used in calculating the wage index, partially offset
by an estimated 2.1% increase in the hospital market basket.

According to CMS, the two-year phase-out will save Medicare $2.9 billion over five years
and improve payment accuracy.

The phase-out to the budget neutrality adjustment factor (BNAF), which was
implemented in 1997, was slated to begin in FY 2009, but Congress suspended the
reduction in the American Recovery and Reinvestment Act for this year.

The legislation did not, however, affect FYs 2010 and 2011. CMS plans to reduce the
BNAF by 75% in FY 2010 and ultimately eliminate it in FY 2011.

CMS said the proposed rule “would bring the Medicare hospice wage index more in line
with that used for home health agencies, while maintaining the fiscal integrity of Medicare
and allowing continued access to services for its beneficiaries.”

CMS also is proposing, per a Medicare Payment Advisory Commission recommendation,
to require hospice physicians who certify or recertify a beneficiary as terminally ill to write
a short narrative on the certification briefly describing the clinical evidence supporting a
life expectancy of six months or less (as required to qualify for the Medicare hospice

The proposal is intended to increase accountability in the physician hospice certification
and recertification process.

To this end, the proposal also seeks comments on whether a physician or nurse
practitioner should be required to visit every hospice patient after 180 days on the
benefit, and every benefit period thereafter.

CMS Proposes 2.4% Update For IRFs In FY 2010
The Centers for Medicare and Medicaid Services (CMS) proposed April 28, 2009 a 2.4%
market basket update to the inpatient rehabilitation facility (IRF) prospective payment
system (PPS) for fiscal year (FY) 2010.

CMS projects this payment rate, coupled with a proposed outlier threshold of $9,976, will
mean a total increase in IRF payments under the proposed rule of $150 million.

The outlier threshold is the amount estimated to maintain outlier payments equal to 3%
of total estimated payments under the IRF PPS for FY 2010, CMS explained in a press

The new payment rates will be effective October 1, 2009. CMS is accepting comments on
the proposed rule until June 29, 2009.

CMS also is proposing changes to the framework for selecting and caring for Medicare
patients in IRFs, which is more costly than other settings such as hospital outpatient
departments, skilled nursing facilities, or home healthcare.

In addition to the proposed rule, CMS also is posting draft revisions to the Medicare
Benefit Policy Manual for public comment to make conforming changes based on the
proposed rule and provide further detailed guidance on selecting patients for admission to
IRFs and implementing individual treatment plans.

“CMS is proposing updates to the current IRF coverage criteria that would better reflect
industry-wide best practices, and improve understanding and consistency of medical
necessity guidelines,” said CMS Acting Administrator Charlene Frizzera.

Specifically, the proposed rule would clarify requirements for preadmission screening to
determine whether a patient should receive rehabilitations services in an IRF or in
another, less intensive setting; post-admission treatment planning; and ongoing care
coordination throughout the inpatient stay.

According to a CMS fact sheet, under the proposed rule, each candidate for IRF care
would have to undergo a comprehensive preadmission screening conducted by a qualified
clinician or clinicians designated by a rehabilitation physician no more than 48 hours prior
to admission.

The proposed rule also would require that IRF services be ordered by a rehabilitation
physician and be coordinated by an interdisciplinary team, including at least a registered
nurse with specialized training or experience in rehabilitation; a social worker or case
manager; and a licensed or certified therapist from each therapy discipline involved in
treating the patient.

Under the proposed rule, this interdisciplinary care team would have to perform a post-
admission evaluation within 24 hours of admission to determine whether the results of
the preadmission screening were still accurate and to develop an overall plan of care
tailored to the individual patient.

Therapy treatments should begin within 36 hours after the patient’s admission to the IRF,
CMS said.

CMS is proposing that the individualized plan of care be in place within 72 hours of a
patient’s admission to the IRF and that the interdisciplinary team meet at least once a
week to ensure the appropriate establishment and achievement of treatment goals.

CMS also is proposing that a rehabilitation physician conduct face-to-face visits with the
patient a minimum of at least three days per week throughout the patient’s stay to
assess the patient both medically and functionally, as well as to modify the treatment
plan as necessary.

Other Developments

Congress Overrides Bush Veto Of Medicare Bill, CMS Moves To
Implement New Law
In July 2008, the House and Senate voted by substantial margins to override President
Bush’s veto of a Medicare package (H.R. 6331) that blocks the over 10% reimbursement
cut to physicians that went into effect July 1, 2008.

As promised, President Bush vetoed the measure July 15, 2008. Bush said he supported
averting the physician payment cut, but objected to provisions that would “undermine
Medicare Part D, reduce payments for [Medicare Advantage (MA)] plans, and restructure
the MA program in a way that would lead to limited beneficiary access, benefits, and
choices and lower-than expected enrollment in Medicare Advantage.”

Bush also charged that the Medicare Improvements for Patients and Providers Act of
2008 “would imperil the long term fiscal soundness of Medicare by using short-term
budget gimmicks that do not solve the problem.”

Democratic lawmakers, however, blasted the veto. Before the vote, House Ways and
Means Committee Chairman Charles Rangel (D-NY) said Congress would “send a strong
message to the nation that the needs of millions of beneficiaries should come before the
needs of the insurance industry.”

A number of Republicans also voiced their disappointment in the President’s veto. “This
bipartisan bill strikes the right balance between caring for our seniors by improving
Medicare and ensuring doctors are available to treat them,” said Senator Gordon Smith

Both houses of Congress voted convincingly to override the veto: the Senate by a 70-26
vote and the House by a 383-41 margin.

As a result, Medicare will maintain the current 0.5% increase in physician reimbursement
rates through the remainder of 2008 and provide a 1.1% update in 2009.

The measure also puts in place an 18-month delay of the competitive bidding program for
durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS), which also
went into effect July 1, 2008.

In addition, the legislation reinstates the therapy caps exception process for medically
necessary services as of July 1, 2008. CMS said claims submitted with the therapy cap
exception modifier will be processed as soon as the payment rates have been activated,
while those submitted without the modifier, and rejected or denied, can be resubmitted
for reimbursement.

Medicare Payments On Physician Imaging Services Down With
Medicare expenditures on physician imaging services declined in 2007 after payment caps
mandated by the Deficit Reduction Act of 2005 (DRA) were put in place, the Government
Accountability Office (GAO) found in a September 26, 2008 report.

According to the report, Medicare: Trends in Fees, Utilization, and Expenditures for
Imaging Services before and after Implementation of the Deficit Reduction Act of 2005,

Medicare expenditures on physician imaging services on a per-beneficiary basis declined
12.7% in 2007, compared to 11.4% increases from 2000 to 2006.

At the same time, during 2007, per-beneficiary utilization continued to rise, albeit at a
slower rate (3.2%) than for the 2000-2006 time period (5.9%).

The report examined the implications of a DRA provision that capped Medicare fees for
certain imaging services covered by the physician fee schedule at what the program pays
for these services under the Medicare hospital outpatient prospective payment system

The cap applies only to the fee physicians receive for performing—as opposed to
interpreting—an imaging test, GAO explained.

The Centers for Medicare and Medicaid Services (CMS) implemented the OPPS cap for
imaging services performed on or after January 1, 2007, as required by the DRA.

GAO found in 2007 the OPPS cap reduced the fee for about 25% of physician imaging
tests overall, and fees for advanced tests (about 65%) were more likely than other
imaging tests (about 13%) to be paid at the OPPS rate.

Specifically, GAO noted that nearly all MRIs and CTs were paid at the OPPS rate, and that
among advanced imaging tests fee reductions varied widely.

CMS said GAO’s findings were in line with its own estimates. CMS also was encouraged
that GAO’s findings seemed to suggest beneficiary access to imaging services was
maintained, although it remains concerned about the high volume of imaging services.

Patient Safety

HHS Issues Final Rule Implementing Patient Safety Legislation
The Department of Health and Human Services (HHS) published in the November 21,
2008 Federal Register (73 Fed. Reg. 70732) a final rule implementing patient safety
legislation enacted in 2005 to promote medical error reporting.

The Patient Safety and Quality Improvement Act of 2005, Pub. L. No. 109-41, set forth
privilege and confidentiality protections in civil and criminal proceedings for “patient
safety work product” (PSWP) reported by providers to new patient safety organizations

The PSOs will collect, aggregate, and analyze the data to identify ways to prevent
medical errors.

The final rule, which is effective January 19, 2009, details the framework for confidential
error reporting and specifies the requirements and procedures for entities to become

“By making it easier for clinicians and health care organizations to report and learn from
adverse events without fear of new legal liability, we will be able to improve our Nation’s
health care systems and minimize factors that can contribute to mistakes,” said HHS
Secretary Michael Leavitt in a press release.

The Agency for Healthcare Research and Quality (AHRQ) already has listed 15 PSOs
pursuant to interim guidance issued in October 2008. These organizations will retain their

PSO status throughout the interim period and are expected to comply with the final rule
once it takes effect.

According to HHS, the final PSO rule, while generally consistent with the February 2008
proposal (73 Fed. Reg 8112), includes a number of changes or new requirements. For
example, the final rule requires PSOs to notify providers if PSWP it submits is
inappropriately disclosed or its security is breached. The final rule also adds flexibility to
requirements for how a component PSO maintains separation between itself and its
parent organizations.

The final rule also includes changes from the proposed rule regarding the listing and
delisting of PSOs and the ways PSOs must comply with statutory requirements.

HHS said it modified the definition of PSWP to include information that, while not yet
reported to a PSO, is documented as being within a provider’s patient safety evaluation
system and that will be reported to a PSO.

“This modification allows for providers to voluntarily remove, and document the removal
of information from the patient safety evaluation system that has not yet been reported
to a PSO, in which case, the information is no longer patient safety work product,” the
final rule said.

The final rule also expands the types of entities and organizations excluded from listing
as PSOs and increases flexibility in how PSOs can store PSWP.

Under the final rule, PSOs’ listings automatically expire after three years, unless
specifically continued by the Secretary. In addition, the final rule provides an expedited
delisting process for PSOs in certain serious circumstances.

OIG Examines Key Issues Surrounding Reporting Of Adverse
Events Nationally And For State Reporting Systems
Twenty-six states currently have adverse event reporting systems, the Department of
Health and Human Services Office of Inspector General (OIG) said in a report, Adverse
Events In Hospitals: State Reporting Systems (OEI-06-07-00471).

OIG found the states' reporting requirements varied, including the list of reportable
events; criteria for determining whether events are reportable; and the extent to which
adverse event details, such as the specific location in which the event occurred or key
factors that contributed to the event, must be reported.

OIG is mandated under the Tax Relief and Health Care Act of 2006 to report to Congress
on the incidence of "never events" among Medicare beneficiaries, payment by Medicare
or beneficiaries for services furnished in connection with such events, and the processes
that the Centers for Medicare and Medicaid Services (CMS) uses to identify events and
deny payment.

"Never events" are specific adverse events that the National Quality Forum deemed
"should never occur in a health care setting," the report explained.

Twenty-three states had established their own lists of reportable adverse events, and
three states used the National Quality Forum’s list of Serious Reportable Events, OIG

Although state officials were reluctant to estimate the extent to which adverse events go
unreported, most states with reporting systems said they have mechanisms to identify
underreporting and strategies to improve reporting, OIG said.

In addition, 25 of the 26 states with event reporting systems indicated that information
submitted to the system is kept confidential.

The report found that state staff identified two major purposes for their adverse event
reporting systems: to hold individual hospitals accountable for their patient care
performance and to disseminate information more broadly with the goals of allowing
hospitals to learn from others’ experiences and prevent adverse events.

In this regard, 23 states reported using data to hold individual hospitals accountable and
18 reported using data to promote learning and prevent adverse events.

OIG concluded that the differences it found among states "make event reporting systems
data unsuitable for use in the aggregate to identify national incidence and trends."

In another report issued the same day, Adverse Events In Hospitals: Overview Of Key
Issues (OEI-06-07-00470), OIG identified seven key issues that are critical to the study
of adverse events.

According to the report, one issue is that estimates of the incidence of adverse events in
hospitals vary widely and no optimal method for measuring events has been identified.
Estimates range from less than 3% to greater than 20% of patients experiencing adverse
events, the report found.

Another issue to be aware of is nonpayment policies for adverse events. Such policies are
gaining in prominence, OIG said, including CMS' 2008 policy to deny hospitals higher
payment for admissions complicated by selected adverse events.

Such policies are viewed as a powerful incentive to reduce incidences of events and lower
healthcare costs, but they can also raise potential drawbacks, such as limiting access to
care and increasing hospital costs while reducing revenue, the report said.

OIG also found that although adverse events are reported to several different entities,
stakeholders suspect substantial underreporting occurs.

While the disclosure of adverse event information can assist patients in making decisions
about care and pressure hospitals to improve patient safety, the report also noted such
reporting can have legal implications for providers and patients.

For example, when adverse event information is reported outside the hospital, legal
protection may be lost and can increase the likelihood that individual cases are known
and result in loss of patient confidentiality.

Among other issues identified in the report are barriers to hospitals staff reporting of
adverse events, and that some hospitals and clinicians may be slow to adopt or routinely
apply practices for preventing adverse events.

Some stakeholders, however, described the current environment "as being on the verge
of accelerating progress and indicated that with continued focus, hospitals can reduce the
overall incidence of adverse events and improve quality of care," OIG said.

Adverse Events In Hospitals: State Reporting Systems (OEI-06-07-00471).

Adverse Events In Hospitals: Overview Of Key Issues (OEI-06-07-00470).

HHS Announces First-Ever Resolution Agreement Of Potential
HIPAA Violations
Seattle-based Providence Health & Services (Providence) has agreed to pay $100,000
and to implement a “robust” Corrective Action Plan to resolve potential violations of the
Health Insurance Portability and Accountability Act (HIPAA) privacy and security rules,
the Department of Health and Human Services (HHS) announced July 17, 2008.

The first-ever Resolution Agreement imposed by HHS on a covered entity stems
from potential privacy and security breaches that arose when unencrypted electronic
backup media and laptop computers were removed from the Providence premises and
were left unattended on several occasions between September 2005 and March 2006.
The media and laptops were subsequently lost or stolen, compromising the protected
health information of over 386,000 patients, HHS said.

As part of the agreement, Providence must revise its polices and procedures regarding
physical and technical safeguards (e.g. encryption) governing off-site transport and
storage of electronic media containing patient information, subject to agency approval;
train workforce members on the safeguards; conduct audits and site visits of facilities;
and submit compliance reports to HHS for three years.

According to an HHS press release, Providence’s cooperation with the Office for Civil
Rights (OCR), which enforces the HIPAA privacy rule, and the Centers for Medicare and
Medicaid Services, which oversees HIPAA security compliance, helped it avoid a civil
money penalty.

“We are committed to effective enforcement of health information privacy and security
protections for consumers. Other covered entities that are not in compliance with the
Privacy and Security Rules may face similar action,” said OCR director Winston Wilkinson.

“The protection of patient information is a top priority for Providence Health & Services,”
said Providence’s Chief Information Security Officer Eric Cowperthwaite. “Since these
incidents occurred, we have reinforced our security protocols and implemented new data
protection measures. Under the terms of the agreement we will continue to implement
appropriate policies, procedures and training.”

FTC Delays Red Flag Rules Enforcement
The Federal Trade Commission (FTC) announced October 22, 2008 that it was delaying
enforcement of key elements of its identity theft detection, prevention, and mitigation
rules, also known as the “Red Flag Rules,” to allow “creditors” and financial institutions
additional time to fully implement policies and procedures designed to thwart identity
theft. The Red Flag Rules will be applicable, in many circumstances, to both for-profit and
not-for-profit healthcare providers.

The FTC stated that “some industries and entities within the FTC’s jurisdiction have
expressed confusion and uncertainty about their coverage under the rule.” Recent
outreach by the FTC to the healthcare industry and the industry’s response suggests that
the applicability of the Red Flag Rules to healthcare enterprises has been less than
obvious to many.

In its Enforcement Policy Statement, the FTC noted that “Given the confusion and
uncertainty within major industries under the FTC’s jurisdiction about the applicability of
the rule, and the fact that there is no longer sufficient time for members of those
industries to develop their programs and meet the November 1 compliance date, the
Commission believes that immediate enforcement of the rule on November 1 would be
neither equitable for the covered entities nor beneficial to the public.”

Duties regarding the detection, prevention, and mitigation of identity theft, codified as 16
C.F.R. § 681.2, now will become enforceable on May 1, 2009, a six-month reprieve from
the original enforcement deadline of November 1, 2008. Healthcare providers subject to
enforcement by the FTC (under Section 681.2) now have an additional 180 days to
develop policies, implement procedures, and train their staff on the implications of the
Red Flag Rules.

The announcement does not delay the November 1, 2008 enforcement date for
companion provisions within the Red Flag Rules (16 C.F.R. § 681.1, pertaining to duties
of users of consumer reports who encounter discrepancies, and 16 C.F.R. § 681.3,
pertaining to duties of card issuers regarding changes of address).

The FTC’s Red Flag Rules are promulgated under authority of the Fair and Accurate Credit
Transactions Act of 2003 (FACTA), which amended the Fair Credit Reporting Act (FRCA),
all of which is codified at 15 U.S.C. § 1681, Pub. L. No. 108-159, 117 Stat. 1952.
Appendix A to the Red Flag Rules contains a number of specific guidelines designed to
assist in detecting, preventing, and mitigating identity theft. See Appendix A to Part
681—Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation at 16
C.F.R. Part 681.

* This item was contributed by Laird Pisto, MultiCare Health System (Tacoma, WA).

**FTC April 30, 2009 decided to further delay enforcement of the Red Flag Rules for
three months until August 1, 2009.

OIG Criticizes CMS’ Oversight Of HIPAA Security Compliance
The Centers for Medicare and Medicaid Services (CMS) needs to be more proactive in
overseeing and enforcing implementation of the Health Insurance Portability and
Accountability Act (HIPAA) Security Rule, the Department of Health and Human Services
Office of Inspector General (OIG) said in a recent report.

CMS’ complaint-driven enforcement approach to ensuring covered entities comply with
HIPAA security requirements fails to address a number of “significant vulnerabilities” the
OIG said it identified during its audits of various hospitals nationwide.

“In fact, CMS has received very few complaints regarding potential HIPAA Security Rule
violations,” the OIG said.

The OIG recommended that CMS establish policies and procedures for conducting HIPAA
Security Rule compliance reviews of covered entities rather than rely on complaints to
identify cases of noncompliance.

The OIG said after it completed its fieldwork, but before the report was issued, CMS
executed a contract to conduct compliance reviews at covered entities.

The OIG also acknowledged that, while ineffective as an exclusive mechanism to monitor
compliance with the HIPAA Security Rule or to safeguard electronic protected health

information (ePHI), CMS’ complaint-driven review process is well developed and

The report is based on audits OIG conducted from July 25, 2008 through August 24,
2007 of hospitals nationwide.

“Preliminary results of these audits show numerous, significant vulnerabilities in the
systems and controls intended to protected ePHI at covered entities. These vulnerabilities
place the confidentiality and integrity of ePHI at high risk,” the report said.

CMS disagreed with the report's findings stating it believes the complaint-driven
enforcement process has promoted voluntary compliance. At the same time, CMS
acknowledged that compliance reviews are a useful enforcement tool as part of an overall
enforcement strategy.

According to the OIG, many of the vulnerabilities it identified would not have been
flagged by HIPAA Security Rule complaints. As of October 31, 2005, CMS received only
413 potential Security Rule complaints out of more than 16,000 total HIPAA complaints.

Nationwide Review of the Centers for Medicare & Medicaid Services Health Insurance
Portability and Accountability Act of 1996 Oversight (A-04-07-05064).

Georgia Supreme Court Say HIPAA Trumps State Law
Concerning Defense Attorneys’ Ex Parte Contact With Prior
Treating Physicians
The Georgia Supreme Court held November 3, 2008 that a defendant’s attorneys in a
medical malpractice action could not informally interview the plaintiff’s prior treating
physicians unless Health Insurance Portability and Accountability Act (HIPAA) privacy rule
requirements were met.

Reversing an October 2007 appeals court decision, the high court said HIPAA, not
Georgia law, governed such ex parte communications because the federal
statute “affords patients more control over their medical records when it comes to
informal contacts between litigants and physicians.”

Thus, defense counsel may informally interview plaintiff’s treating physicians only after
obtaining a valid authorization or a protective order or ensuring the patient was given
notice and an opportunity to object to the ex parte contact in accordance with HIPAA. See
45 C.F.R. § 164.512(e).

Plaintiff Amanda Moreland sued Dr. Michael Austin and his employers for medical
malpractice after her husband died while in Austin’s care at the Coliseum Medical Center.

Moreland produced her husband's medical records, including documents relating to his
prior treatment by three cardiologists.

Defense counsel contacted each physician and asked for “an assessment of Mr.
Moreland's cardiovascular status and his prognosis” while under each physician’s care.

Moreland objected to such contact, claiming that it violated the HIPAA privacy rule.

The trial court eventually held Austin could interview Mr. Moreland's prior treating
physicians, but only after giving reasonable notice to Moreland so that her attorneys
could be present during the discussions.

The appeals court reversed, holding that as long as a physician discloses protected health
information in compliance with HIPAA and Georgia law, defense counsel may continue to
communicate with the physician in an ex parte fashion.

The Georgia Supreme Court said the appeals court’s analysis missed the mark because it
failed to recognize that HIPAA preempts Georgia law with regard to ex parte
communications between defense counsel and plaintiff’s prior treating physicians.

Under Georgia law, a plaintiff waives his right to privacy with regard to medical records
that are relevant to a medical condition the plaintiff placed at issue in court proceedings.

“HIPAA, on the other hand, prevents a medical provider from disseminating a patient’s
medical information, whether orally or in writing, without obtaining a court order or the
patient’s express consent,” the high court said.

Thus, the high court concluded, HIPAA is more stringent than Georgia law and therefore
preempts it.

The high court added that defense counsel could still communicate informally with a
patient’s treating physicians so long as the contact was not intended to elicit protected
health information.

With respect to meeting HIPAA’s requirements for such ex parte contact at issue in the
instant case, the court said service of a request for production of documents was not
sufficient notice and opportunity for Moreland to object as it related only to production of
written documents, not oral contact and the discovery of the physicians’ recollections and
mental impressions.

Moreland v. Austin, No. S08G0498 (Ga. Nov. 3, 2008).

IOM Says New Privacy Framework Needed For Health Research
The Health Insurance Portability and Accountability of 1996 (HIPAA) does not protect
privacy as well as it should and in fact actually impedes important health research,
according to a report issued by the Institute of Medicine (IOM).

The report, Beyond the HIPAA Privacy Rule: Enhancing Privacy, Improving Health
Research, recommended that federal policymakers develop a new privacy framework
apart from HIPAA for health research that standardizes ethical oversight and emphasizes
strong security protections.

This framework would apply to all of the nation’s health research regardless of funding
source or the holder of the data, the report said.

According to the report, privacy protections need to distinguish between information-
based research, involving medical records and stored samples, and interventional clinical
research, involving human subjects.

The IOM recommended extending the Common Rule, which generally applies to federally
funded research in humans, to all interventional research regardless of funding source.

For information-based research, the IOM said the Department of Health and Human
Services (HHS) and other federal agencies should implement new goal-oriented federal
oversight that focuses on best practices in privacy, security, and transparency.

The IOM called for expanding the use of de-identified data with legal sanctions for
unauthorized re-identification.

Where personally identifiable information is used in research without individual consent,
IOM recommended two oversight mechanisms: a local ethical review board or federal
certification of institutions that have policies and practices in place to protect data privacy
and security.

As an alternative to devising a new privacy approach, the IOM proposed amending the
HIPAA Privacy Rule’s health research provisions to reduce variability in interpretation
among Institutional Review Boards and Privacy Boards and standardize requirements.

The report was produced by the IOM’s Committee on Health Research and the Privacy of
Health Information.

Stimulus Bill Includes Sweeping Expansion Of HIPAA And Data
Breach Notification Requirements
This item is an excerpt from an article written for Health Lawyers Weekly by James
B. Wieland, Ober|Kaler.

The American Recovery and Reinvestment Act of 2009 (ARRA), the “Stimulus Bill,”
includes Title XIII—“Health Information Technology,” also known as the “Health
Information Technology for Economic and Clinical Health Act” or “HITECH Act.” The
HITECH Act contains significant expansions of the Health Insurance Portability and
Accountability Act (HIPAA) Privacy and Security Rules and numerous other changes that
will have a major impact on the healthcare information and technology sector. Virtually
every healthcare provider and third-party service provider that stores or accesses
individuals’ medical information will be affected by this new federal law.

Effective Date

Except where otherwise specifically provided, the effective date of the Improved Privacy
Provisions and Security Provisions discussed in this article appears to be 12 months after
enactment. However, as noted below, there are a number of provisions with different
effective dates.

Business Associates will be subject to HIPAA security provisions and to
sanctions for violation of business associate requirements.

The HIPAA requirements for administrative, physical, and technical information
safeguards and written policies and procedures will apply directly to Business Associates,
as well as civil and criminal penalties for violations. The Department of Health and Human
Services (HHS) Secretary will publish annual guidance on “the most effective and
appropriate technical safeguards” for this purpose.

Other HITECH Act security provisions also apply. As discussed below, Business Associates
must detect and report “security breaches” to Covered Entities.

The HITECH Act also provides that a Business Associate that obtains or creates Protected
Health Information (PHI) pursuant to a written contract or arrangement may use or

disclose PHI only “in compliance with each applicable requirement of [45 C.F.R.] 164.504
(e).” The cited section contains the detailed implementation requirements for a Business
Associate Agreement as well as the requirement for action in the event of knowledge of a
“pattern of activity or practice” that is a material breach of the Business Associate
Agreement. In other words, whatever the Business Associate Agreement provides,
Business Associates will be directly responsible for full compliance with the relevant
requirements of the Privacy Rule itself, and subject to civil and criminal penalties if they
fail to do so.

This provision, in conjunction with the provisions regarding notification of security
breaches discussed in the next section, will have a major, long term impact on service
providers who work with PHI, the “non-covered entity” sector of the health information
system. This provision closes what was perceived by regulatory authorities as a
significant gap in the jurisdictional ambit of HIPAA. As originally written, HIPAA was
limited to health plans, healthcare clearinghouses, and healthcare providers who
conducted core “back office” transactions in electronic form. Third-party service providers
were not initially subject to direct regulation.

Federal law now requires consumer notification of data breaches involving
“unsecured” PHI. Both Covered Entities and Business Associates must comply.

The breach notification provisions are effective for breaches that occur 30 days after the
Secretary of HHS publishes implementing interim final regulations. These regulations are
due within 180 days after enactment.

The notification protocol generally follows the “California model” of notification already
adopted by the majority of states. However, the new federal notification requirements are
more stringent than the notification laws of many states in several respects:

      The breach is deemed discovered on the first day that the breach is known or
       should reasonably have been known to the entity, including to any employee,
       officer, or “other agent” (other than the individual committing the breach).
      Individual notification must be provided within 60 days of discovery, absent a law
       enforcement official’s instructions to the contrary.

In addition to notice to affected individuals, Covered Entities also must notify the HHS
Secretary of a breach of security. This notice must be provided immediately if the breach
involves 500 or more individuals. Covered Entities may maintain a log of breaches
involving less than 500 individuals, and provide the log to the Secretary annually. The
Secretary will post a list of Covered Entities providing a notice of breaches involving 500
individuals or more on its website.

Business Associates must report a security breach to the Covered Entity within the same
time frame. A Business Associate who fails to do so will be subject to direct enforcement
and penalties.

“Unsecured” PHI is PHI that is not protected by “technologies and methodologies that
render Protected Health Information unusable, unreadable, or indecipherable to
unauthorized individuals,” i.e., in lay terms, PHI that is not encrypted. The burden of
proof of compliance, including compliance with the timeliness of notice, is explicitly on the
Covered Entity or Business Associate.

Vendors of personal health records and their service providers made subject to
the same security breach notification requirement.

These provisions are captioned in the HITECH Act as “Temporary.” They have the same
Effective Date as the parallel provision for Covered Entities and Business Associates.
However, the Personal Health Record (PHR) Vendor provisions sunset if Congress enacts
new legislation establishing requirements for security breach notification for entities that
are not Covered Entities or Business Associates.

A PHR vendor has the same obligations as to security breaches as a Covered Entity and a
third-party service provider has the same obligations as a Business Associate.

Breaches related to a PHR are initially reported to the Federal Trade Commission (FTC);
the FTC will notify the Secretary of HHS. Failure of a PHR vendor or a service provider to
comply with the requirements of this section is an “unfair and deceptive trade practice”
enforceable within FTC jurisdiction.

Individuals may require Covered Entities not to disclose certain self pay services
to health plans.

Under the Privacy Rule pre-HITECH Act, an individual has a right to request restrictions
on disclosure of the individual’s PHI, but a Covered Entity is not required to grant that
request, although the individual’s request is retained in the record.

Under the HITECH Act, a Covered Entity is required to agree to an individual’s request for
privacy protections as to the disclosure of PHI for payment or healthcare operations if the
information pertains only to a healthcare item or service that the individual has paid for
out of pocket in full, unless disclosure is otherwise required by law or is for treatment

This provision answers one of the consumer privacy concerns about Health Care
Information Exchanges (HIEs) (f/k/a Regional Health Information Networks (RHIOs))—
that individuals might not want their insurance companies to know about certain
healthcare services out of concern that the treatment would affect the individual’s
insurance rates or insurability.

The limited data set becomes a default minimum necessary standard.

HIPAA regulates a Covered Entity’s uses and a Covered Entity’s disclosures of PHI. For
non-treatment and most other disclosures, Covered Entities are required to use, disclose,
and request only the “minimum necessary” amount of PHI.

The HITECH Act provides that, in order to be treated as in compliance with the HIPAA
minimum necessary requirements, a Covered Entity must limit its requests for and use or
disclosures of PHI to (i) a “Limited Data Set” “to the extent practicable,” or (ii) “if needed
by such entity,” (i.e. apparently, the Limited Data Set is not “practicable”) to the
minimum necessary to accomplish the intended purpose of such use, disclosure, or

The Limited Data Set has, to date, mainly been the concern of entities engaged in
research. A Limited Data Set is still PHI under HIPAA, but all “direct identifiers” have
been removed.

The Secretary of HHS is directed to issue guidance on what constitutes the minimum
necessary within 18 months of enactment. This provision sunsets after those regulations
are issued.

Covered Entities using electronic health records (EHRs) are required to provide
accounting of disclosures of PHI for treatment, payment, and healthcare

HIPAA, pre HITECH Act, exempted a Covered Entity from an obligation to provide
individuals with an accounting of disclosures of their PHI if, among other things, the
disclosure was for treatment, payment, or healthcare operations.

Under the HITECH Act, this exception is eliminated as to Covered Entities that use

For disclosures by a Business Associate, the Covered Entity may provide the accounting
or may direct the individual to its Business Associates, who must comply with the
accounting requirements.

In recognition of the burden that this is likely to impose, the period for which an
accounting is required is limited to three years, not the six-year period otherwise

The effective date of this provision is delayed, as follows:

      For Covered Entities, insofar as they acquired an EHR as of January 1, 2009, the
       accounting requirement applies to disclosures made on or after January 14,
      For Covered Entities insofar as they acquired an EHR after January 1, 2009, the
       provision will be effective for disclosures on the later of January 1, 2011 or the
       date upon which the entity acquires the EHR.
      The Secretary of HHS can impose a later effective date but it can be no later than
       2016 for the Covered Entities with EHR as of January 1, 2009 and 2013 for all
       other Covered Entities with EHR.

Restrictions on the remuneration for “sale” of EHRs or PHI

A Covered Entity or a Business Associate cannot “directly or indirectly” receive
remuneration in exchange for any PHI of an individual except pursuant to a valid HIPAA
authorization that includes specifics on any further exchanges of the PHI by its recipient.

Presumably, consistent with earlier, unrelated comments of the Secretary of HHS, the
federal fraud and abuse test for what constitutes direct or indirect remuneration will

The HITECH Act provides a number of exceptions to this prohibition, including transfers
for public health activities, as defined by HIPAA; transfers for research purposes, subject
to the limitations on the remuneration; and transfers for treatment, unless the Secretary
of HHS determines otherwise.

This provision of the HITECH Act is effective only for exchanges that occur six months
after the Secretary of HHS promulgates implementing regulations. The Secretary is
directed to promulgate those regulations within 18 months of enactment.

The HIPAA healthcare operations exception for “marketing” communications is
narrowed significantly, if direct or indirect remuneration is received.

Pre-HITECH Act, a Covered Entity or Business Associate could provide communications
that might otherwise be considered marketing without individual authorization if the

communication was to describe a healthcare item or service or third-party payment for
the item or service, for treatment, or for case management or counseling about
alternative treatments. These activities were considered healthcare operations.

Under the HITECH Act, such communications are not healthcare operations, if the
Covered Entity or Business Associate making the communication receives “direct or
indirect remuneration” for making the communication. The relatively broad federal fraud
and abuse definition of remuneration is likely to apply. Payment for treatment, however,
is specifically not remuneration for this purpose.

This change does not apply, if:

      The communication is about a current drug or biological the recipient is taking,
       under certain circumstances, if the remuneration is “reasonable,” a term to be
       defined by the Secretary of HHS.
      The communication is made by the Covered Entity based on a valid HIPAA
      The communication is made by a Business Associate of the Covered Entity in
       accordance with a written Business Associate Agreement.

The Act provides for “Improved Enforcement”

The Act amends the Social Security Act to add a provision requiring the Secretary to
“formally investigate any compliant of a violation of this part if a preliminary investigation
of the facts of the complaint indicate such a possible violation due to willful neglect”

The Act clarifies that for purposes of the definition of wrongful disclosure “a person
(including any employee or other individual) shall be considered to have obtained or
disclosed individually identifiable health information in violation of this part if the
information is maintained by a covered entity . . . and the individual obtained or disclosed
such information without authorization.”

State AG Suits for HIPAA Violations

In addition, under ARRA state attorneys general are authorized to bring a civil action on
behalf of any resident in connection with an alleged HIPAA violation. The AG is authorized
to seek an injunction, statutory damages, and attorneys’ fees in the lawsuit.

Under the provisions, state AGs may outsource the lawsuits to private attorneys on a
contingency fee basis.

Business groups strongly opposed inclusion of the provision in the legislation. The U.S.
Chamber of Commerce warned the provision allows private law firms to litigate HIPAA
enforcement and will lead to “higher costs and increased regulatory complexity.”

FTC Seeks Comments On Breach Notification Proposal; HHS
Issues Guidance On Safeguarding Health Information
The Federal Trade Commission (FTC) issued April 16, 2009 a notice seeking comments on
a proposed rule requiring vendors of personal health records (PHRs) and related entities
to notify consumers and the FTC when the security of their individually identifiable health
information is breached.

FTC issued the notice to comply with the economic stimulus bill, the American Recovery
and Reinvestment Act of 2009 (ARRA), which was signed into law on February 17, 2009.

Under ARRA, FTC must promulgate, within 180 days of enactment, interim regulations on
breach of security notification requirements included in the statute for entities not subject
to the Health Insurance Portability and Accountability Act (HIPAA).

ARRA also requires the Department of Health and Human Services (HHS) and the FTC to
study potential privacy, security, and breach notification requirements and submit a
report to Congress by February 2010.

Until Congress enacts legislation implementing any recommendations contained in the
joint report, the ARRA contains temporary requirements to be enforced by the FTC that
such entities notify customers in the event of a security breach. The proposed rule
implements these requirements.

In the FTC’s notice of proposed rulemaking, the agency notes HHS, under the ARRA, also
must promulgate interim final regulations related to breach notification requirements for
HIPAA-covered entities and their business associates.

“To the extent that FTC-regulated entities engage in activities as business associates of
HIPAA-covered entities, such entities will be subject only to HHS’ rule requirements and
not the FTC’s rule requirements,” the proposed rule says.

According to FTC estimates, roughly 900 entities will be subject to the proposed rule’s
breach notification requirements.

The FTC’s breach notification rule, proposed 16 C.F.R. pt. 318, describes and clarifies
ARRA requirements and indicates what triggers the notice requirement, and the timing,
method, and content of the notice, among other things.

Application and Scope

The proposed rule applies the breach notification requirements to vendors of personal
health records, PHR related entities, and third-party service providers (who must notify
vendors or related entities of a breach so that they can, in turn, notify individual
consumers and the FTC).

FTC cites a number of examples of PHR related entities, including web-based applications
that help consumers manage medications, websites offering online personalized health
checklists, and companies advertising dietary supplements online.

PHR related entities also include non-HIPAA covered entities “that access information in a
personal health record or send information to a personal health record.”

Under the proposed rule, third-party service providers, which was not defined by ARRA,
include entities that provide billing or data storage services to vendors of PHRs or PHR
related entities.

Notice Requirement Triggers

Tracking the statutory language, the proposed rule defines “breach of security” as the
acquisition of unsecured PHR identifiable health information of an individual in a PHR
without the individual’s authorization.

In the proposed rule, FTC emphasizes that the key requirement triggering the notification
requirement is whether the data has been acquired, not merely whether there was
unauthorized access.

For example, FTC says breach notification would not be required in a scenario where an
employee inadvertently accessed a database, realized his or her mistake, and logged off
without reading, using, or disclosing anything.

“[T]he Commission believes that the entity that experienced the breach is in the best
position to determine whether unauthorized acquisition has taken place,” the proposed
rule says.

Thus, the proposed rule would create a presumption that unauthorized persons have
acquired information if they have access to it, which can be rebutted “with reliable
evidence showing that the information was not or could not reasonably have been

With respect to what constitutes “PHR identifiable health information,” the proposed rule
includes in the definition information relating to past, present, or future payment, which
would include a database containing names and credit card information.

The definition also includes information that an individual has an account with a PHR
vendor or related entity regarding particular health conditions; for example, a customer
list directed to AIDS patients or people with mental illnesses.

De-identified information as defined under HIPAA rules would not be considered “PHR
identifiable health information” and therefore would not trigger the breach notification

Breach Detection

The notification requirement is triggered where the PHR vendor or related entities
“reasonably” should have known of the breach through security measures aimed at
detecting breaches in a timely manner.

“The Commission recognizes, that certain breaches may be very difficult to detect, and
that an entity with strong breach detection measures may nevertheless fail to discover a
breach. In such circumstances, the failure to discover the breach would not constitute a
violation of the proposed rule,” FTC says.


In accordance with ARRA, the proposed rule requires breach notifications to individuals
and the media “without unreasonable delay” and in no case later than 60 calendar days
after discovery of the breach.

The FTC emphasizes that the 60-day period serves as an “outer limit,” meaning in some
cases it may constitute unreasonable delay to wait 60 days before providing notification.

Under the proposed rule, vendors of PHR and related entities must provide notice to the
FTC “as soon as possible” and in no case later than five business days if the breach
involves the unsecured PHR identifiable health information of 500 or more individuals.

Breaches involving less than 500 individuals may be accounted for in a breach log and
submitted to the Commission on an annual basis from the date of the entity’s first

HHS Guidance

Meanwhile, the Department of Health and Human Services (HHS) issued guidance April
17, 2009 on "technologies and methodologies to secure health information and prevent
harm by rendering health information unusable, unreadable, or indecipherable to
unauthorized individuals."

ARRA required HHS to publish the guidance, which the agency says builds on existing
HIPAA requirements.

According to HHS, the guidance "provides steps entities can take to secure personal
health information and establishes the trigger for when entities must notify that patient
data has been compromised."

HHS said the guidance is related to the breach notification regulations it will publish for
HIPAA-covered entities as required under ARRA.

CVS To Pay $2.25 Million To Settle Claims Its Disposal Practices
Violated HIPAA
The nation’s largest retail pharmacy chain CVS Caremark Corp. agreed to pay the federal
government $2.25 million to resolve claims its disposal practices failed to safeguard
patient privacy in accordance with the Health Insurance Portability and Accountability Act
(HIPAA), the Department of Health and Human Services (HHS) announced February 18,

In addition to the monetary settlement, CVS agreed to implement a “robust” corrective
action plan to ensure compliance with HIPAA requirements.

The settlement follows the first-of-its-kind joint investigation by HHS’ Office for Civil
Rights (OCR) and the Federal Trade Commission (FTC) stemming from media reports that
CVS pharmacies were disposing of trash such as pill bottle labels with identifying patient
information in dumpsters accessible by the public.

According to the agencies, the investigation also revealed that CVS was not training
employees adequately about proper disposal methods.

In its complaint, FTC alleged CVS’ claim that “nothing is more central to our operations
than maintaining the privacy of your health information” was deceptive and the pharmacy
chain’s security practices also were unfair in violation of the FTC Act.

The FTC's proposed consent order requires CVS to establish, implement, and maintain a
comprehensive information security program to safeguard personal information it collects
from consumers and employees.

As part of the settlement, CVS must engage a qualified independent third party to
monitor its compliance with the corrective action plan and consent order and regularly
report back to the two federal agencies.

The HHS corrective action plan will be in place for three years, while the FTC requires
monitoring under its consent order for 20 years.

In a statement, CVS said after the media reports surfaced in 2006, the company
responded by “promptly enhancing its retail waste disposal polices and training programs,
and instituted a chain-wide shredding program for confidential waste to further guard
against inadvertent disposal of confidential information in the regular trash.”

CVS said it was not aware of any consumer harm arising out of the alleged incidents. The
company expressly denied any wrongdoing and said it agreed to the settlement “to avoid
the time and expense of further legal proceedings."

Minnesota Appeals Court Enjoins Hospital From Disciplining
Physician, Finds Peer Review Action Motivated By Malice
The Minnesota Court of Appeals affirmed June 3, 2008 a temporary injunction preventing
a hospital from professionally disciplining a physician.

The appeals court found the hospital’s peer review action was motivated by malice; thus,
the hospital was not entitled to immunity under either federal or state law.

The case arose when the hospital’s Vice President for Medical Services began an
investigation of the physician for allegedly disruptive behavior. The hospital Vice
President met with other hospital leaders and reported that the physician was disruptive
and that discipline might be necessary.

The hospital’s president, the chief of its medical staff, and another member of the
hospital’s leadership subsequently wrote a letter to the Credentials Committee alleging
disruptive behavior by the physician and requesting a peer-review investigation.

The physician then met with the Credentials Committee and generally denied the
allegations. The Committee, however, concluded the physician’s improper conduct had
been established and showed a pattern of unacceptable behavior.

The Committee recommended suspending the physician’s privileges for 120 days and
requiring him to undergo anger-management training, followed by probation for one

The hospital’s Medical Staff Executive Committee reviewed the Credentials Committee’s
recommendation and suggested increasing the suspension to 180 days and the probation
to two years.

After a series of hearings and appeals, the hospital’s board of trustees imposed a 120-
day suspension and a five-year probationary period.

The physician then sued to enjoin the hospital’s disciplinary action. The trial court granted
a temporary injunction and the hospital appealed.

The appeals court rejected the hospital’s argument that it was immune from suit under
the Health Care Quality Improvement Act (HCQIA), 42 U.S.C. § 11111(a).

HCQIA applies only to damages, the appeals court held, and not to injunctions. Thus,
HCQIA did not protect the hospital from the physician’s suit seeking an injunction.

The appeals court also rejected the hospital’s argument that it was protected from the
injunction under state law.

The appeals court explained that "a hospital forfeits its state-law immunity if its peer-
review process was motivated by malice toward the subject of a peer-review inquiry."
Here, the appeals court agreed with the lower court’s finding of malice.

The lower court based its conclusion on several findings of procedural irregularities, which
taken together “clearly demonstrate that Hospital intentionally, and repeatedly, violated
its own established procedural safeguards,” the appeals court said.

 “The objective evidence of how Hospital violated its procedures in the course of
disciplining Physician is a sufficient basis to infer the conclusion of why the Hospital acted
as it did—that it was motivated by malice,” the appeals court held.

The appeals court next addressed an argument made in amici briefs that “characterize
Physician’s suit as a dangerous invitation for courts to substitute their judgment for that
of hospital peer reviewers and thereby undermine the peer-review process.”

The appeals court explained that “[n]either the ruling of the district court nor our decision
here implicates the judgment of the peer reviewers on the merits.”

Instead, the appeals court argued that “[j]udicial review of peer-review actions is
properly limited, as in this case, to only whether peer reviewers abided by their own
established procedures.”

Lastly, the appeals court found without merit the hospital’s argument that the physician
contractually agreed not to challenge any of its peer-review decisions in court because a
“contract cannot release a party from intentional or willful acts.”

In re Peer Review Action, No. A07-0813 (Minn. Ct. App. June 3, 2008).

Nevada Supreme Court Finds State May Not Discipline Physician
For Single Act Of Negligence
The Nevada Supreme Court held July 11, 2008 that under the relevant statutory law, the
state may not discipline a physician for a single act of ordinary negligence. Accordingly,
the high court affirmed a lower court's reversal on other grounds of the disciplinary action
imposed on the physician.

Steven Mahnke, M.D. worked as a family practice physician in Central City, Nevada. One
of Mahnke's pregnant patients suffered a miscarriage. Mahnke performed a D&C, during
which the patient began to bleed. Following the surgery, the patient suffered cardiac
arrest and died.

The state later filed an operative petition for disciplinary action against Mahnke alleging
unprofessional conduct. Following a hearing, the director of the Department of Health and
Human Services Regulation and Licensure (Department) found Mahnke’s conduct was
unprofessional and was outside the normal standard of care in Nebraska.

The director entered an order suspending Mahnke’s license for 90 days, requiring a
refresher course in obstetrics, prohibiting him from performing D&C or dilation and
evacuation procedures except to save the mother’s life or in an emergency, and imposing
a two-year probation upon reinstatement.

Mahnke petitioned the district court for review. The court agreed with Mahnke that the
locality rule should apply in determining whether his acts constituted unprofessional
conduct for the disciplinary action, instead of a national standard of care as used in the

Accordingly, the court concluded that the state failed to present clear and convincing
evidence that Mahnke’s conduct was unprofessional and reversed the director's order.
The state appealed.

The Nevada Supreme Court first addressed the threshold question of whether the state
may discipline a physician for a single act of negligence. After examining the statute at
issue, Sections 71-147 and 71-148 of the Nevada Uniform Licensing Law, the high court
found that the general definition contained in the statute "does not include as
unprofessional conduct a single act of ordinary negligence."

As a basis for its decision, the high court pointed to Section 71-147(5)(e), which was
added as an amendment to the statute. Under that Section, the state may discipline a
professional for "[p]ractice of the profession (a) fraudulently, (b) beyond its authorized
scope, (c) with manifest incapacity, (d) with gross incompetence or gross negligence, or
(e) in a pattern of negligent conduct."

According to the high court, "pattern of negligent conduct" is defined as "a continued
course of negligent conduct in performing the duties of the profession."

Thus, the high court said, the legislature did not intend for the state to be able to
discipline a medical professional for a single act of negligence.

The high court further found that, as the Department's regulations did allow a physician
to be subject to discipline for an act of ordinary negligence, they were invalid as
inconsistent with the Uniform Licensing Law.

Mahnke v. State, No. S-06-918 (Neb. July 11, 2008).

Fifth Circuit Reverses Ruling For Physician In Closely
Watched Peer Review Case Against Hospital
The Fifth Circuit reversed July 23, 2008 a judgment awarding $33 million to a cardiologist
who alleged a hospital’s temporary restriction of his catheterization lab privileges was
improper and caused injury to his reputation and career.

The appeals court found the hospital was immune under the Health Care Quality
Improvement Act (HCQIA) from money damages for the abeyance of the physician’s
privileges while it investigated concerns involving his handling of several patients.

Dr. Lawrence R. Poliner and his professional association sued Presbyterian Hospital of
Dallas and several other physicians, including cardiologists that served on various
hospital peer review committees, (collectively defendants) after his privileges were
summarily suspended. Poliner claimed defendants improperly and maliciously used the
peer review process to interfere with his interventional cardiology practice.

According to the facts described in the Fifth Circuit’s opinion, defendants initially asked
Poliner to agree to an abeyance—or temporary restriction—on his cath lab privileges
following a number of concerns about his treatment of several patients. The abeyance
was later extended after an ad hoc committee concluded Poliner gave substandard care in
more than half of the 44 cases they reviewed.

Subsequently, the committee agreed unanimously to suspend Poliner’s privileges. The
suspension was in effect for roughly five months. The abeyance lasted less than 29 days.

In a September 2003 opinion, the U.S. District Court for the Northern District of Texas
granted defendants summary judgment on Poliner’s deceptive trade practice act and
antitrust claims. The court also granted summary judgment to defendants on all claims
related to Poliner’s suspension, finding them immune under HCQIA.

The court concluded, however, that issues of fact precluded summary judgment on
whether defendants were entitled to HCQIA immunity with respect to claims stemming
from the abeyance.

Thus, the court permitted Poliner’s claims of breach of contract, defamation, business
disparagement, tortious interference with a contract, and intentional infliction of
emotional distress to proceed to a jury.

A jury found in favor of Poliner and awarded him compensatory and exemplary damages
of over $366 million. The district court remitted the award to $22 million plus
prejudgment interest, which amounted to $11 million.

Reversing, the Fifth Circuit held the district court should have found defendants were
entitled to HCQIA immunity in connection with the abeyance and the extension of the
abeyance as a matter of law.

As an initial matter, the appeals court noted that both the abeyance and the extension
were professional review actions under HCQIA.

Next, the appeals court found it clear that each peer review action was taken “in the
reasonable belief that the action was in the furtherance of quality health care,” citing the
specific concerns facing defendants about the care Poliner provided to certain patients.

Although subsequent investigation may have revealed that Poliner did not affirmatively
endanger his patients, this was irrelevant to the HCQIA inquiry, the appeals court

“If a doctor unhappy with peer review could defeat HCQIA immunity simply by later
presenting the testimony of other doctors of a different view from the peer reviewers, or
that his treatment decisions proved to be ‘right’ in their view, HCQIA immunity would be
a hollow shield,” the appeals court commented.

The appeals court also expressed serious doubts as to Poliner’s assertions that the
restrictions resulted from anticompetitive motives, and in any event “roundly rejected
that such subjective motivations overcome HCQIA immunity.”

The appeals court next found no reasonable jury could conclude defendants failed to
make a “reasonable effort to obtain the facts.” On this point, Poliner argued the evidence
was insufficient to conclude he was a “present danger” to patients under the bylaws,
which supported a finding that “reasonable effort” was lacking.

But the appeals court stressed that “a failure to comply with hospital bylaws does not
defeat a peer reviewer’s right to HCQIA immunity from damages.”

The appeals court further clarified that this did not leave a physician without remedy
when hospitals and peer review committees violate applicable bylaws and state law.

HCQIA immunity covers only money damages, and physicians still have recourse in the
courts for appropriate injunctive and declaratory relief.

The appeals court also held the peer review actions at issue satisfied HCQIA’s procedural
requirements, finding Poliner was treated fairly under the circumstances, particularly
given the restrictions imposed on him were temporary and limited in scope.

Finally, the appeals court concluded the peer review action was taken “in the reasonable
belief that the action was warranted by the facts known after such reasonable effort to
obtain facts.”

Again the appeals court emphasized that the restrictions were temporary and tailored to
address specific concerns—i.e. Poliner’s performance of procedures in the cath lab.

“Not only has Poliner failed to rebut the statutory presumption that the peer review
actions were taken in compliance with the statutory standards, the evidence
independently demonstrates that the peer review actions met the statutory
requirements,” the Fifth Circuit concluded.

Poliner v. Texas Health Sys., No. 06-11235 (5th Cir. July 23, 2008).

Wisconsin Supreme Court Holds Peer Review Law Immunizes
Third-Party Clinic From Physician’s Medical Misdiagnosis Claim
The Wisconsin peer review statute, Wis. Stat. § 146.37, immunizes from liability for
negligent misdiagnosis a third-party addictionology center that a hospital’s governing
body asked to diagnosis and treat one of its surgeons based on concerns about his
alcohol use, the state’s high court ruled July 16, 2008.

The high court found the Hazelden center was eligible for immunity under the peer review
statute because it “played an integral role” in the hospital’s medical peer review process.

The Wisconsin Supreme Court held even if Hazelden negligently diagnosed Dr. Hans
Rechsteiner’s condition as “alcohol dependence,” rather than “alcohol abuse,” immunity
still attached because its diagnosis was made in good faith.

Likewise, the high court said statutory immunity applied as to Rechsteiner’s claim that
certain hospital board members defamed him in their communications with the treatment

Rechsteiner worked as a general surgeon for Spooner Health System on a contract basis.
From 1982 until July 2003, Rechsteiner was the only full-time surgeon at Spooner and
was “on call” 24 hours per day, seven days per week, unless he made prior arrangements
with other surgeons in the region.

Following reports that Rechsteiner was consuming alcohol while on call, Spooner gave
him the option in March 2003 of going on immediate leave or submitting to an alcohol
assessment and, if necessary, treatment.

Rechsteiner agreed to undergo the assessment at Hazelden treatment center, where he
was diagnosed with “alcohol dependence.” Rechsteiner underwent the required
treatment. He later sued Hazelden for negligence, claiming he was misdiagnosed and, as
a result, underwent unnecessary treatment that cost him income and affected his

Rechsteiner also sued Spooner, its board, and several of its directors (Spooner
defendants) for defamation and negligent communication of false information to Hazelden
about him.

Hazelden and the Spooner defendants each moved for summary judgment, arguing the
peer review statute provided them immunity from civil liability.

The trial court granted the motion and the appeals court affirmed.

The Wisconsin Supreme Court also affirmed. The high court found no dispute that
Spooner’s board, acting on concerns about Rechsteiner’s future performance as a
surgeon, particularly given his rigorous on-call schedule, qualified for immunity under
Section 146.37.

Likewise, the high court concluded Hazelden was eligible for immunity, rejecting
Rechsteiner’s argument that the outside treatment center was too removed from
Spooner’s peer review process.

“We would defeat the purpose of Wis. Stat. § 146.37 if we held that the participation of
an outside entity—enlisted by a reviewing committee to perform an assessment of the
abilities of a physician to perform effectively while on call—is not eligible for immunity
simply because the outside entity is not part of a formal ‘peer review’ program,” the high
court wrote.

When Rechsteiner chose to access and participate in the assessment option, rather than
take a voluntary leave of absence, he effectively approved the scope and length of the
peer review process with Hazelden, the high court said.

After finding Hazelden eligible for protection under the peer review law, the high court
next determined that its diagnosis, even if deemed negligent, still qualified for immunity
so long as it was made in good faith because it was central to the peer review process.

“We conclude that Hazelden’s diagnosis of Dr. Rechsteiner’s condition was
indistinguishable from Spooner’s review, evaluation, and analysis of Dr. Rechsteiner’s
ability to perform as an on-call surgeon,” the high court said.

The high court declined to rule on whether treatment related to the peer review process
also qualified for immunity.

Instead, the high court granted summary judgment to Hazelden on the specific facts—i.e.
that Rechsteiner failed to raise a genuine issue of material fact that his treatment would
have or should have differed with a diagnosis of “alcohol abuse.”

“Like the court of appeals, we are not prepared to say that the peer review statute would
immunize medical negligence in all situations, irrespective of circumstances,” the high
court commented.

As to the defamation claims, the high court found the Spooner defendants immune under
the peer review law, which does not distinguish between different classes of persons who
enjoy immunity.

The Spooner defendants’ statements to Hazelden, whether or not they were of a personal
nature, were aimed at the treatment center review and to improve the performance of
the hospital’s on-call surgeon. Rechsteiner failed to present facts to overcome the
presumption that the Spooner defendants were not acting in good faith

“[I]nsight into a physician’s social and personal behavior is relevant to an inquiry of
alleged alcohol abuse,” the high court said.

Rechsteiner v. Hazelden, No. 2006AP1521 (Wis. July 16, 2008).

Eighth Circuit Says Surgery Practice Must Pay Contribution To
Physician In Dispute Over Recruitment Loan
A surgery practice in Arkansas must contribute equally to a physician’s loan repayment
obligation to a hospital that arose when he failed to meet the terms of a recruitment
agreement, the Eighth Circuit ruled August 5, 2008.

Affirming summary judgment to the physician, the appeals court found that because the
surgery practice signed the loan agreement, it was jointly and severally liable with the
physician for repayment of the loan.

The Eighth Circuit also agreed with the district court that the surgery practice should pay
a portion of the physician’s attorneys’ fees.

Baptist Health and Central Arkansas Vascular Surgery (CAVS) jointly hired Dr. Todd
Smith to offer medical services with both institutions. Baptist Health agreed to provide
Smith a loan to start his practice, which it would forgive if Smith practiced in Arkansas for
six years.

After entering into the agreement, Smith practiced in Arkansas for two years and then
left. Baptist Health sued Smith to recover the roughly $158,000 loaned to him. Smith
filed a third-party complaint against CAVS and Dr. Robert Casali, alleging they had to
indemnify him against any obligations owed to Baptist Health.

In a 2007 decision, the Eighth Circuit rejected Smith’s indemnification claim, but
remanded to the district court to consider the issue of contribution.

On remand, the district court found that because Casali signed the loan agreement both
individually and on behalf of CAVS, they were jointly and severally liable for a pro rata
share of the roughly $158,000 Smith already had paid to Baptist Health.

The district court also awarded Smith $12,000 in attorneys’ fees for the approximately
$17,000 he expended in successfully defending against Casali’s and CAVS’ breach of
contract claim, as well as contribution of two-thirds of the over $14,000 in attorneys’ fees
Smith was ordered to pay in Baptist Health’s original breach of contract action.

The Eighth Circuit agreed that Casali’s and CAVS’ signatures made them jointly and
severally liable for the obligations created by the note and loan agreement.

In so holding, the appeals court rejected their argument that the district court failed to
consider the equities because Smith intentionally breached the loan agreement with
Baptist Health by voluntarily moving to Texas.

“Both parties presented their evidence on the equities, and the issue became largely a
matter of credibility for the district court,” the appeals court said.

The appeals court also affirmed both attorneys’ fees awards. While Casali and CAVS
argued they were the prevailing parties because they won on Smith’s indemnification
claim, which sought a greater amount than the contribution claim, the appeals court

According to the appeals court, the case involved three claims—Smith’s indemnification
and contribution claim and Casali’s and CAVS’ breach of contract claim against Smith.
Because Smith prevailed on two of the three claims (the contribution and breach of
contract claims), the district court correctly determined he was the prevailing party.

Baptist Health v. Smith, No. 07-2684 (8th Cir. Aug. 5, 2008).

Mississippi Supreme Court Holds Surgeon’s Allegedly Defamatory
Statements Against Fellow Surgeon Protected By Qualified
A surgeon could not sue another physician for defamation because the statements he
allegedly made to fellow surgeons were protected under Mississippi’s qualified privilege,
the state high court found in an en banc ruling.

Dr. Hazem Barmada sued Dr. Ara K. Pridjian for alleged defamation arising out of their
working relationship as heart surgeons at Memorial Hospital at Gulfport.

When Barmada applied for privileges at Memorial, Pridjian, the medical director of cardiac
surgery, inquired about Barmada’s background using sources identified in his resume.

Memorial’s credentialing committee eventually accepted Barmada’s application. After he
started work at the hospital, Barmada became the subject of criticism from doctors and

An independent review found Barmada’s work to be “adequate,” despite a higher
mortality rate.

In his lawsuit, Barmada presented testimony from a nurse that Pridjian had made
“generally slanderous comments about [Barmada] in front of the heart team at

The court granted summary judgment in Pridjian’s favor, finding defendant’s statements
were protected by a qualified privilege and there was no evidence of malice.

The Mississippi Supreme Court affirmed. Under Mississippi law, in addressing defamation
claims the court must first determine whether a qualified privilege applies and, if one
does, whether it is overcome by malice, bad faith, or abuse, the high court explained.

The high court agreed with the lower court that the qualified privilege applied because
Pridjian’s allegedly defamatory statements were made to Memorial administrators,
doctors, the surgical staff, and an independent reviewer, all of whom had a direct interest
in Barmada’s competency as a surgeon.

The high court expressed some concern about Pridjian’s testimony that he could not
remember whether he had made statements about Barmada’s competency to physicians
who were not Memorial employees.

Non-Memorial employees would not have a direct interest in protecting a common
employer and therefore, in that scenario, the qualified privilege would not apply, the high
court noted.

But because no definitive evidence existed as to whether Pridjian made defamatory
statements to anyone outside Memorial’s employment, the high court concluded the
privilege applied.

Finally, the high court found no evidence of malice or bad faith by Pridjian to overcome
the qualified privilege.

In so holding, the high court said evidence that a supervising physician criticized a fellow
physician as incompetent did not rise to the level of maliciousness absent other evidence.

Barmada v. Pridjian, No. 2007-CA-00764-SCT (Miss. Aug. 14, 2008).

Illinois Appeals Court Says Medical Journals, Action Plan
Privileged Under Peer Review Law
Medical journal articles gathered and considered by a hospital sentinel event analysis
committee as well as its “action plan” containing recommended risk-reduction strategies
were privileged under Illinois peer review law, an appeals court in that state ruled.

The wrongful death action was brought by the husband and administrator of the estate of
Judy Anderson, who died unexpectedly from broncho-pneumonia the same day she
presented at Rush-Copley Medical Center’s (defendant’s) emergency room.

At issue in the foregoing discovery dispute were various medical journal articles
considered by defendant’s Sentinel Event Analysis Committee following Anderson’s death.
In addition, plaintiff also sought discovery of the Committee’s “action plan” summarizing
its conclusions and recommendations.

Defendant claimed the documents were privileged under the Illinois Medical Studies Act
(Act), which protects from disclosure “[a]ll information . . . used in the course of internal
quality control . . . .”

The trial court ultimately concluded the medical journal articles were discoverable
because they were available to the general public and were not produced as a result of
the committee’s internal investigation or study.

The court also concluded the portions of the action plan recommending changes in
hospital policy that were in fact implemented were not privileged because they
constituted the “final result of a medical peer review committee.” Those
recommendations that had not been implemented, however, were privileged, the court

Defendant refused to produce the documents and the trial court found Rush-Copley in

The Illinois Appellate Court, Second District, reversed the contempt order and found both
the medical journal articles and the action plan privileged.

While acknowledging the trial court’s rationale that the medical journal articles were not
created or generated by the committee, the appeals court nonetheless concluded they
were privileged because they reflected “the Committee’s internal review process,
including information gathering and deliberations.”

The appeals court noted defense testimony that the articles were “specific” to decedent’s
case and therefore were part of the “information gathering” related to the peer review

The appeals court recognized that its holding seemingly contradicted state court
precedent that the Act does not protect information generated before the peer-review
process begins.

But the appeals court distinguished the instant action from those cases, which involved
information generated by the defendant hospital’s medical staff about the patient at
issue. Here, the appeals court noted, applying the privilege to the medical journal articles
would not frustrate the Act’s goal of improved patient care because doing so would not
conceal any “adverse facts” known to defendant’s medical staff about Anderson’s care.

The appeals court also held the entire action plan was privileged, not just those portions
that had not been implemented by the hospital.

According to the appeals court, the evidence established that the action plan merely
consisted of “recommendations or internal conclusions” that may or may not result in
changes. Thus, the action plan was not discoverable because defendant established it
was only for “internal quality control.”

The result would be different, however, for “[a]ny actual changes, such as modifications
to hospital policy or procedure, that were adopted as a direct result of the
recommendations and internal conclusions in the Action Plan . . . .,” the appeals court

Anderson v. Rush-Copley Med. Ctr., Inc., Nos. 2-07-0717 & 2-07-1272 (Ill. App. Ct. Aug.
14, 2008).

Montana Supreme Court Says State Medical Board Owed No Duty
Of Care To Specific Patient In Licensing Physician
The Montana Board of Medical Examiners (Board) was not entitled to quasi-judicial
immunity for its actions in granting a medical license to a physician who was subject to
disciplinary action for unprofessional conduct in other states, the Montana Supreme Court
ruled October 6, 2008.

Despite this finding, the high court nonetheless affirmed the trial court’s grant of
summary judgment to the state in a medical malpractice action brought by the personal
representative of a patient who died while under the physician’s care.

According to the high court, the state owed no specific duty to the patient at issue under
the statutes governing the licensing of healthcare providers.

The case involved Dr. Thomas Stephenson, who in 1995 sought a medical license from
the Board to practice general medicine in Montana.

Stephenson had previously worked as a cosmetic surgeon in California, where he faced
disciplinary action for unprofessional conduct, including false claims in advertising, gross
negligence in treating patients, and dishonesty and corruption.

His medical license there had been revoked, although the revocation was stayed pending
Stephenson’s successful completion of 10 years’ probation with certain conditions,
including a ban on practicing cosmetic surgery.

Stephenson’s application materials for his Montana license also revealed alcohol abuse
and Demerol addiction, 11 malpractice suits, bankruptcy, and a history of illegible

medical records. His license in Florida also had been suspended for his failure to notify
the state about the actions taken against his license in California.

The Board interviewed Stephenson and granted him a temporary license subject to
certain conditions. In January 1999, the Board granted Stephenson a full, unrestricted

Subsequently, one of Stephenson’s patients, Emil J. Nelson, died from an abdominal
aneurysm. His wife (plaintiff), as the personal representative of Nelson’s estate, sued the
state, alleging the Board was negligent in granting Stephenson a medical license.

The state moved to dismiss, arguing the Board’s decisions were protected by quasi-
judicial immunity or, alternatively, that it owed no duty of care to Nelson in licensing

The trial court eventually granted summary judgment to the state on the issue of quasi-
judicial immunity.

On appeal, the Montana Supreme Court affirmed, albeit on the alternative ground that
the state owed no specific duty to Nelson.

The high court disagreed with the trial court that the Board’s decision-making process
was entitled to quasi-judicial immunity.

First, the high court concluded that the Board was not performing discretionary, quasi-
judicial functions when it issued the license to Stephenson.

The relevant Montana statute in effect during the relevant time period required the Board
to “refrain” from issuing licenses to those who committed “unprofessional conduct.” The
statute, the high court said, “clearly reflects mandatory, nondiscretionary duties.”

The high court also rejected the state’s contention that the entire three-year process
between the Board’s receipt of Stephenson’s application and its issuance of an
unrestricted license was a controversy or adversarial proceeding.

Instead, the high court noted that Stephenson at no point challenged any of the Board’s
requirements or its decision to issue a temporary license with certain conditions.

Thus, regardless of whether the Board was performing discretionary functions, its actions
were not undertaken in the context of a controversy or adversarial proceeding and
therefore were not entitled to quasi-judicial immunity.

But the high court went on to find the state did not owe a duty of care to Nelson. Rather,
the high court concluded that the medical licensing statutes benefit the general public
and do not create a special duty to an individual.

Nothing in the relevant licensing statute “supports a legislative intent to protect a specific
class of persons from a particular type of harm,” the high court said.

“Thus, we further conclude that the statutory special relationship exception to the public
duty doctrine does not exist,” and “hold the State did not owe a duty of care to” Nelson.

A dissenting opinion argued the state “owed a duty to [Nelson], not to insure against
specific instances of malpractice, but to investigate applicants and license only qualified,
competent physicians whom he might seek care for his health needs.”

Another dissenting opinion characterized the majority’s opinion of the public duty doctrine
as “a duty to all is a duty to none.”

Calling the majority’s opinion untenable, this dissenter argued the legislature “enacted
the medical licensing laws to protect innocent, unsuspecting, sick Montanans” like Nelson
from physicians like Stephenson.

Nelson v. Montana, No. 05-694 (Mont. Oct. 6, 2008).

Eighth Circuit Says Nebraska AG Entitled To Immunity In
Physician’s Due Process Suit
The Nebraska Attorney General was entitled to qualified immunity in a physician’s lawsuit
alleging his constitutional due process rights were violated when the state issued a public
letter of concern in connection with his medical license without giving him detailed notice
of the charges and an opportunity to respond, the Eighth Circuit ruled November 3, 2008.

Reversing a district court decision, the appeals court concluded the public letter of
concern could not be equated to a formal censure and that the physician was not entitled
to due process protection for damage to his reputation alone.

The case involved Gregory M. Kloch, M.D., who in May 2002 received notice from the
Nebraska Department of Health and Human Services Regulation and Licensure
(Department) that a complaint had been filed against him and that an investigation was

Three months later, Kloch received a letter of concern from the Nebraska Board of
Medicine and Surgery explaining that he had been investigated for failing to keep proper
medical records on a patient.

The letter also stated that it was intended as cautionary only and was not a disciplinary
action against Kloch’s license. Pursuant to the state’s Uniform Licensing Law, the letter
was added to Kloch’s public record and posted on the Department’s website.

After Kloch was unable to have the letter of concern expunged, he filed an action in court
against Attorney General Jon C. Bruning, in his individual and official capacity, and
various members of the medical board and the Department of Health.

Kloch contended the issuance of the letter violated his due process rights under the Fifth
and Fourteenth Amendments to the U.S. Constitution.

The district court concluded the Uniform Licensing Law was unconstitutional on its face
and as applied to Kloch. The court also found qualified immunity protected all defendants
except Bruning, concluding that, as a licensed attorney, he reasonably should have
known the law was unconstitutional.

The state legislature has since eliminated letters of concern from the state’s regulatory
scheme, according to the appeals court’s opinion.

The Eighth Circuit reversed the district court’s conclusion that Bruning was not entitled to
qualified immunity.

The appeals court said the dispositive question in Kloch’s claim was whether the letter of
concern impaired his medical license.

In this regard, the appeals court distinguished a letter of concern from a formal letter of
censure. While formal censures “are unmistakably adversarial,” Kloch’s letter of concern
“opens with a salutation and closes with a request that he ‘please accept this letter as a

The appeals court also noted that formal censures “express strong condemnation of the
accused, and they do so with gravity and clarity.”

Moreover, the appeals court continued, administrative regulations prohibited
consideration of “uncharged incidents,” such as letters of concern, when imposing
subsequent disciplinary sanctions.

Finally, the appeals court said, even if Kloch properly alleged a constitutional violation,
Bruning was entitled to qualified immunity because the right at issue was not so clearly
established that a reasonable official would have known his conduct was unconstitutional.

Kloch v. Kohl, No. 07-2120 (8th Cir. Nov. 3, 2008).

U.S. Court In Florida Refuses To Dismiss Challenge To Florida’s
Patients Right To Know Amendment
A federal district court in Florida refused to dismiss on procedural grounds a challenge to
a constitutional amendment passed by Florida voters that gives patients the right to
access information from healthcare providers about adverse medical incidents.

Plaintiffs, the Florida Hospital Association and the Florida Medical Association, among
others, brought the action in federal district court alleging the “Patients Right To Know
Amendment,” or Amendment 7, violates the U.S. Constitution.

Specifically, the groups contended that “Amendment 7 is expressly preempted by,
conflicts with congressional policy in, and represents an obstacle to the accomplishment
of federal statutes governing the medical review process.”

In addition, the groups’ complaint alleged that Amendment 7, which was approved by
Florida voters in 2004, violates healthcare providers’ constitutional right to informational
privacy, denies them their due process rights, and substantially impairs the obligations of
existing contracts.

The action in the U.S. District Court for the Northern District of Florida was brought
against defendant Florida state officials: the Surgeon General and Secretary of the
Department of Health and Human Services; the Secretary of the Agency for Health Care
Administration; and the Attorney General.

Defendants moved to dismiss on a number of procedural grounds. In a November 26,
2008 opinion, the court found the action should go forward.

The court rejected the officials’ argument that plaintiffs sued the wrong defendants. The
court noted each of the named defendants has the authority under Florida law to enforce
the obligations that Amendment 7 imposes on at least some of the plaintiffs.

The court also concluded the case presented a “live and ripe case or controversy” as
plaintiffs indicated they already had received 400 demands for information under
Amendment 7.

Next, the court found the plaintiff associations had standing to assert the rights of their
members (hospitals and physicians) who had received requests for information under
Amendment 7.

Finally, the court disagreed with the Florida officials that plaintiffs failed to join required
parties—namely the 400 patients who had demanded information under Amendment 7
and the Department of Health and Human Services Secretary.

The Florida Supreme Court in March 2008 held Amendment 7 applies retroactively to
existing medical records, trumping any previous statutory protections limiting discovery
during litigation.

Resolving a split among the lower courts, the Florida high court concluded the self-
executing amendment is prospective in operation, but retrospective as to extant records
created before the provision’s November 2, 2004 effective date.

Florida Hosp. Ass’n v. Viamonte, No. 4:08cv312-RH-WCS (N.D. Fla. Nov. 26, 2008).

Colorado Appeals Court Says Hospital That Revoked Surgeon’s
Privileges Without Notice Or Hearing Not Entitled To HCQIA
A Colorado hospital that revoked a surgeon’s provisional staff privileges without providing
him notice and a hearing was not entitled to immunity under the Health Care Quality
Improvement Act (HCQIA), a state appeals court ruled December 11, 2008.

The Colorado Court of Appeals reversed a lower court’s decision granting summary
judgment to the hospital and three of its officers (collectively, defendants).

In so doing, the appeals court rejected defendants’ argument that HCQIA’s notice and
hearing requirements were waived voluntarily by the surgeon when he applied for
provisional status and agreed to be bound by medical staff bylaws that did not give rise
to hearing and appeal rights for provisional staff.

In spring 2002, plaintiff Eric Anthony Peper, a cardiothoracic surgeon, applied for and
was granted medical staff privileges at St. Mary’s Hospital and Medical Center (St.
Mary’s) in Denver, Colorado.

Subsequently, in December 2002, Peper was reappointed to St. Mary’s provisional active
medical staff until December 2004, and was subject to the terms of the initial
appointment and to hospital and medical staff bylaws.

At that time, St. Mary’s, without notifying Peper, decided to review a random sample of
his cardiothoracic cases. According to Peper, this decision was made after he told the
hospital’s president that he planned to establish a competing medical practice.

An external reviewer examined the selected cases and found a potential “problem with
surgical technique and/or judgment.”

In February 2003, without any notice, St. Mary’s revoked Peper’s privileges and staff
membership. The letter sent to Peper notified him of an already-concluded review
process and external reviewer comments indicating “care falling below generally accepted
standards of review.”

The letter informed Peper that the members of the credentials committee had determined
that, under St. Mary’s bylaws, a physician whose provisional privileges are revoked is not
afforded a hearing or appeal. The committee said it would report the revocation to the
National Practitioner Data Bank and the Colorado Board of Medical Examiners.

Peper filed a lawsuit in state court, seeking monetary damages based on eight contract
and tort claims. The court dismissed the complaint, concluding defendants were entitled
to immunity from damages under the HCQIA.

In an unpublished opinion, a division of the appeals court reversed. A majority of the
court concluded that three of the four HCQIA immunity prerequisites were met, i.e.,
defendants acted in the reasonable belief their action was in furtherance of quality
healthcare; defendants acted after a reasonable effort to obtain the facts; and defendants
acted in the reasonable belief that the action was warranted by the known facts.

The majority ultimately reversed the lower court’s decision, however, after determining
the remaining HCQIA prerequisite, i.e., adequate notice and hearing procedures, had not
been met. The appeals court remanded the case to the lower court for further

The district court then granted summary judgment to defendants, agreeing that, under
the terms of the medical staff bylaws in effect at the time, provisional appointees clearly
and unambiguously were not entitled to a hearing or appeal in the event of an adverse
action against them during the provisional period. Peper appealed.

On second review of the case, the appeals court found Peper’s application for provisional
appointment was legally insufficient to waive his statutory due process rights under

The bylaw provision at issue—that actions against provisional staff do not give rise to
hearing and appeal rights—could be read, at most, to have waived a right to hearing and
appeal under the medical staff bylaws, the appeals court concluded.

However, “[t]here is a legally significant distinction between rights under a hospital’s or
medical staff’s own bylaws and those under the HCQIA,” the appeals court said.

The appeals court concluded Peper’s HCQIA rights to notice and hearing were not waived
by his alleged acknowledgment that medical staff bylaws did not afford him hearing and
appeals rights.

Peper v. St. Mary’s Hosp. and Med. Ctr., No. 07CA2491 (Col. Ct. App. Dec. 11, 2008).

First Circuit Upholds Secretary’s Interpretation Of “Investigation”
For HCQIA Reporting Purposes
In a case of first impression for the federal appellate courts, the First Circuit declined
January 14, 2009 to overturn the Department of Health and Human Services Secretary’s
interpretation of “under an investigation” for purposes of a hospital’s reporting obligations
pursuant to the Health Care Quality Improvement Act (HCQIA).

The Secretary had upheld a hospital’s decision to report a physician’s resignation to the
National Practitioner Data Bank (NPDB) after a hospital committee had completed the
fact-gathering process but before it had taken a final action or formally closed the

The appeals court found the Secretary’s interpretation that the investigation was still
ongoing at the time of the physician's resignation for HCQIA reporting purposes
“eminently sensible” in light of the statute’s legislative history and underlying purpose.

The case arose when an operating room nurse at an unnamed hospital filed a written
complaint against a physician (referred to as Dr. Doe in the opinion) who allegedly
threatened the nurse.

The medical staff executive committee temporarily suspended Doe’s privileges. An ad hoc
investigating committee (AHC) subsequently reported to the executive committee that
the nurse reasonably perceived the physician’s actions as threatening.

The executive committee proposed Doe be allowed to return to work provided he agreed
to certain contractual modifications, including provisions for regular proctoring and
psychological evaluations.

Doe rejected the proposal and voluntarily relinquished his clinical privileges. The hospital
reported Doe’s resignation to the NPDB, believing it was required to do so because the
physician had resigned while “under an investigation.” 42 U.S.C. § 11133(a)(1)(B).

Doe sought an administrative review of the hospital’s filing, contending its investigation
had ended when the AHC presented its report to the executive committee and therefore
he had not resigned while under an investigation.

The Secretary issued a written decision ruling the hospital appropriately reported Doe to
the NPDB.

For purposes of HCQIA, the Secretary found “[a]n investigation is . . . considered ongoing
until the health care entity’s decision making authority takes a final action or formally
closes the investigation.”

Doe sought judicial review, arguing the word “investigation,” as used in HCQIA, refers
only to the fact-gathering phase of an inquiry. But the U.S. District Court for the District
of Maine disagreed and upheld the Secretary’s interpretation in a sealed opinion.

The First Circuit affirmed.

As the district court did, the First Circuit sidestepped the issue of the level of deference to
afford the Secretary’s “informal” interpretation of the word “investigation” as set forth in
the agency’s NPDB Guidebook and his decision in the instant case.