The FCA Insider

The FCA Insider

Insights and updates on False Claims Act Litigation


Federal Court Upholds CMS’ Use of Extrapolation to Claw-Back Improper Payments

A recent federal court decision should serve as an important reminder to providers that the Centers for Medicare and Medicaid Services (“CMS”) and its contractors have substantial authority to audit provider Medicare claims and to broadly apply extrapolation to calculate overpayments. In Palm Valley Health Care, Inc. v. Azar, No. 18-41067, 2020 BL 14097 (5th Cir., Jan. 15, 2020), the United States Court of Appeals for the Fifth Circuit re-affirmed CMS’ application of extrapolation of errors identified in a sample of claims to over 10,000 claims. The resulting demand for the provider, Palm Valley Health Care, Inc. (“Palm Valley”), to refund claims was $12 million rather than the amounts paid on the sample set. Providers need to be aware that when CMS audits their claims, CMS is not required to use the most precise statistical methodology for selecting claims for audit.

Background on CMS Audits and the Application of Extrapolation

As part of its oversight obligations, CMS, through its Medicare Administrative Contractors and other contractors, audits claims submitted for payment to ensure the claims comply with Medicare billing requirements. When CMS determines that it made a payment to a provider for services that were “medically unnecessary or incorrectly billed”, an “actual overpayment” will be deemed to have occurred and CMS will seek a refund of the overpayment from the provider.

Because Medicare cannot conduct a comprehensive review of every claim submitted for payment to ensure it complies with billing requirements, Congress has authorized CMS to use statistical sampling and apply extrapolation when “there is a sustained or high level of payment error.” [1]  Significantly, the Medicare Program Integrity Manual (the “Manual”), which was amended considerably with respect to extrapolation in 2019, provides a broad array of general factors that the contractor “shall” use in order to determine that “a sustained or high level of payment error” has occurred. These factors include but are not limited to:

  1. High error rate determinations by the contractor or by other medical reviews (i.e., greater than or equal to 50 percent from a previous pre- or post-payment review);
  2. Provider/supplier history (i.e., prior history of non-compliance for the same or similar billing issues, or historical pattern of non-compliant billing practices);
  3. CMS approval provided in connection to a payment suspension;
  4. Information from law enforcement investigations;
  5. Allegations of wrongdoing by current or former employees of a provider/supplier; and/or
  6. Audits or evaluations conducted by the Office of Inspector General (“OIG”).[2]

A contractor can also identify reasons beyond those listed above as a basis for using extrapolation (e.g., billing for non-covered services, billing for services not rendered) although those decisions are subject to further review within CMS.[3]

Palm Valley’s Targeted Audit with Extrapolation

In Palm Valley, CMS’s contractor, Palmetto GBA, LLC (“Palmetto”), conducted a targeted audit of Medicare claims submitted by Palm Valley for the period of July 1, 2006 through January 31, 2009. According to CMS, Palm Valley was selected for an audit because it had submitted an unusually high number of claims (10,699) for the period at issue. For the audit, CMS employed a methodology that resulted in 54 claims being selected for review. CMS’ review of those claims determined that 29 claims were not eligible for payment by Medicare because the beneficiaries’ records did not satisfy Medicare’s requirements for eligibility for home health care.

The overpayment for those 29 claims totaled $81,681 but more significantly, the 29 claims represented a 53.7% error rate based on the 54 total claims selected for audit. With this error rate, CMS used extrapolation based on its determination that there had been a “sustained or high level of payment error.” After the administrative appeals process, which overruled the contractor on four claims, by using extrapolation on the remaining 25 claims, Palm Valley was required to repay $12,589,185 to CMS.

CMS Has Substantial Authority to Select Statistical Methods in Extrapolation

Although Palm Valley primarily sought judicial review over whether the denied claims complied with Medicare’s billing requirements for home health care, Palm Valley also challenged CMS’ sample and extrapolation methodology. Palm Valley argued that CMS’ selection of 54 claims out of 10,669—in other words a mere 0.0051% of the total claims Palm Valley submitted during the period at issue was too imprecise of a sample to rely on. After relying upon statutory language to note that the decision that there is a “sustained or high level of payment error” is not reviewable, the court examined the merits of Palm Valley’s argument. The court quickly dismissed it, noting that while the statistical sampling methodology may not be the most precise methodology available, CMS’ selection methodology did represent a valid “complex balance of interests.” Principally, the court noted, quoting the Medicare Appeals Council, that CMS’ methodology was justified by the “real world constraints imposed by conflicting demands on limited public funds” and that Congress clearly envisioned extrapolation being applied to calculate overpayments in instances like this.

While the court suggested it agreed with Palm Valley’s contention that a more precise formula may result in a more precise calculation for extrapolation, the court held that the law merely requires CMS to apply a statistically valid formula—which may not be the most precise formula. Even Palm Valley’s own expert had testified that CMS’ formula was statistically valid. Further, the court held that at a minimum CMS’ methodology provided “substantial evidence” to support CMS’ decision to require Palm Valley to refund claims which did not satisfy Medicare’s billing requirements. The court further noted that, if anything, it believed the extrapolation methodology was “provider friendly” in that CMS’ formula gives the provider substantial benefit of doubt—CMS’ formula assumes that the average overpayment for all claims is equal to a number that there is a 90% chance is smaller than the actual overpayment. Therefore, the court concluded that there was a 90% chance that Palm Valley’s overpayment liability was in fact greater than the $12 million that CMS had determined Palm Valley owed.

Lessons for Providers

While all providers will routinely be required to refund claims that do not satisfy Medicare billing requirements, providers need to be cognizant that sustained billing errors substantially increase their risk for significant audits and refund demands. Providers need to make sure that they not only understand and abide by Medicare’s billing requirements when providing care but also that their documentation supports their claims. This documentation is important not only to make sure the claim is paid upon submission but also to make sure the claim will sustain CMS’ scrutiny if the provider is selected for an audit. Taking relatively small proactive steps during the course of providing care and billing for services can help providers avert potentially financially devastating refunds down the road.

[1] 42 U.S.C. § 1395ddd(f)(3)(A).

[2] Medicare Program Integrity Manual §

[3] Id.


DOJ announces $5.5 Million Settlement Concerning Allegations of Undisclosed Grants

On December 19, 2019, the Department of Justice (DOJ) announced that Van Andel Research Institute (VARI) has agreed to pay $5.5 million to resolve allegations that it violated the False Claims Act by submitting grant applications to the National Institute of Health (NIH) without disclosing Chinese government grants for involved researchers.

VARI is an independent research institute in Grand Rapids, Michigan. Between January 2012 and December 2018, at least one researcher at VARI received funding from China’s Thousand Talents Program. This initiative intends to draw researchers to China for China’s benefit. DOJ explains that not only did VARI omit reference to this funding, but it also “removed references to those grants from the proposed funding attributions in its press release.” Even after receiving correspondence from NIH directly concerning the need to disclose foreign funding, VARI did not disclose the financial source. Instead, VARI sent correspondence in December 2018 to NIH stating that it was not required to disclose the information because “there was no undisclosed overlap of any budgetary resources, commitment, or scientific endeavor” between the Chinese and NIH grants. However, NIH requires disclosure of all financial sources, and DOJ further alleges that VARI does not know whether such an absence of overlap is true.

DOJ explained that enforcement of grant disclosure requirements is particularly important due to the competitive nature of the application process. “Nondisclosures and false statements to granting agencies are especially harmful because they distort competition, disadvantage applicants who play by the rules, and undermine agencies’ decision-making on the use of their limited resources.” As part of this application process, NIH requires that applicants disclose all funding sources. Moreover, intellectual property security has become a top priority for NIH in recent years due to allegations that researchers are stealing applications and sending the concepts abroad.

For those institutions concerned about past application submissions, DOJ highlights that “proactive, timely, and voluntary self-disclosures to the Department about misconduct will receive credit during the resolution of a False Claims Act case.”  This settlement, and the government’s use of the False Claims Act in this context, is a signal that the administration intends to use all tools at its disposal to enforce NIH interpretations of grant requirements. If you have any concerns with your compliance with federal fraud and abuse law or the contents of this alert, please contact any member of our health care department, including the authors of this alert.



DOJ Releases FY 2019 False Claims Act Statistics with Numbers that Highlight the Focus on the Healthcare Industry

The U.S. Department of Justice (DOJ) Office of Public Affairs recently released a report detailing the settlements and judgments from civil cases involving fraud and abuse claims obtained in fiscal year 2019.  In total, the DOJ reports that it obtained more than $3 billion during FY 2019, the substantial majority of which ($2.6 billion) involved the healthcare industry.  The report notes significant penalties involving the healthcare industry, including drug and device manufactures, healthcare providers, and individual owners and directors of healthcare companies.

The vast majority of the settlements and judgments during FY 2019 ($2.1 billion) arose from qui tam whistleblower lawsuits.  The DOJ reported that 633 qui tam suits were filed in 2019, with an average of at least 12 new cases each week.  During FY 2019, the Government paid out $265 million to the whistleblower individuals in these cases.  The DOJ emphasized the “high priority this administration places on deterring fraud against the government” and noted the “tireless efforts” of DOJ investigators and litigators.

There were certain trends that the statistics reflected in terms of common allegations against healthcare providers.  For example, there were multiple settlements involving allegations of improper marketing relationships, purported kickbacks being paid to providers, assertions of coding violations and upcoding, and allegations of false or misleading marketing.

Notably, the DOJ also highlighted several significant cases against, and settlements that were reached with, individuals.

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Members of the healthcare industry should take careful note of the previous year’s settlements and judgments and assess their own internal compliance with healthcare fraud and abuse laws.  If you have any concerns with your compliance with federal fraud and abuse law or the contents of this alert, please contact any member of our healthcare department, including the authors of this alert.


OIG Issues Advisory Opinion Approving Supermarket Pharmacy Loyalty Program

On December 17, 2019, the Office of Inspector General (OIG) issued an Advisory Opinion regarding a proposed supermarket loyalty program that would have provided customers with rewards points on out-of-pocket costs related to the purchase of pharmacy products. OIG determined that while the proposal would implicate the Federal anti-kickback statute (AKS) and the prohibition on beneficiary inducements under the civil monetary penalties (CMP) law, the arrangement would satisfy the CMP law’s exception for retailer rewards and pose minimal risk under the AKS.

The requester operates over 200 grocery stories, approximately half of which operate in-store, full-service pharmacies. The stores operate a loyalty program under which customers may earn points for every dollar spent on “qualifying” purchases.  In particular, qualifying purchases do not currently include costs related to pharmacy items or immunizations. The requester inquired as to the permissibility under federal fraud and abuse laws of expanding the rewards program to include out-of-pocket costs paid in connection with pharmacy products. Rewards points earned on pharmacy products would be available to the general public and subject to the same restrictions (such as expiration dates and point limits) that apply to all other rewards points.

The OIG concluded that although the proposed arrangement would implicate the federal anti-kickback statute and the CMP statutes regarding beneficiary inducements, but would satisfy the requirements of an applicable exception to the definition of remuneration and pose a low risk of fraud and abuse. Specifically, the OIG reasoned that the proposed arrangement would fall under an exception for retailer rewards programs, where:

(1) the rewards consist of coupons, rebates, or other rewards from a retailer;

(2) the rewards are offered or transferred on equal terms available to the general public, regardless of health insurance status; and

(3) the offer or transfer of the rewards is not tied to the provision of other items or services reimbursed in whole or in part by the Medicare or Medicaid programs.

The OIG concluded that the proposed arrangement meets all of these criteria. Furthermore, the OIG concluded that the proposed arrangement would pose a low risk of fraud and abuse under the federal anti-kickback statute for two reasons. First, the risk that the proposed arrangement would drive customers to requester’s supermarkets to purchase federally reimbursable items or services is unlikely. Second, the proposed arrangement would not involve a waiver or reduction in cost-sharing amounts, therefore, the risk of over-utilization or increased costs to the federal health care programs is also small.

Accordingly, the OIG concluded that it would not impose administrative sanctions on the requester in connection with the proposed arrangement. As with all OIG opinions, this conclusion only applies to the proposed arrangement however, it is an informative illustration for those evaluating similar loyalty programs.  If you have any concerns with your compliance with federal fraud and abuse law or the contents of this alert, please contact any member of our health care department, including the authors of this alert.

CMS Guidance, Regulatory

CMS Internal Memorandum Clarifies Impact of Supreme Court Decision on Enforcement Practices

The Deputy General Counsel and Chief Legal Officers at the U.S. Department of Health and Human Services (HHS) Centers for Medicare & Medicaid Services (CMS) recently issued an Internal Memorandum clarifying that a recent Supreme Court ruling may limit HHS’s enforcement practices going forward. Consistent with the Court’s ruling, the Memorandum clarifies that subregulatory guidance issued without notice-and-comment rulemaking may not be used as the sole basis for an enforcement action when such guidance creates or changes a substantive legal    standard.

The Supreme Court issued a ruling earlier this year in Azar v. Allina Health Services, invalidating a CMS payment policy due to the Agency’s failure to provide the public with a notice-and-comment period. The Court reasoned that the policy created a “substantive legal standard,” requiring a notice-and-comment period, and noted that the government cannot evade such notice-and-comment obligations by establishing or changing an “avowedly ‘gap’-filling policy.”

The CMS Memorandum references the Allina ruling and notes that CMS payment rules often form the basis for enforcement actions and would therefore be subject to the rulemaking procedure requirements set forth in Allina. Significantly, the Memorandum points out that guidance and policies promulgated without notice-and-comment rulemaking procedures may not be documents upon which the Agency can predicate enforcement actions. If such guidance documents are to be used as the basis for enforcement actions, the Memorandum clarifies that such documents must comply with Allina.

Specifically, the Memorandum points to Internet-Only Manuals (IOMs) and preamble text published with final rules that are sometimes cited in enforcement actions. To the extent that these texts are closely tied to existing statutory or regularity requirements, they can be implicated in enforcement actions. Because such subregulatory guidance does not substantively establish or change a legal standard, it meets the Allina requirements because it merely aids in demonstrating whether or not parties have failed to meet statutory or regulatory requirements. Where such IOMs and guidance documents issued without notice-and-comment set forth payment rules that are not closely tied to statutory or regularity language, the Memorandum warns that such documents are not validly issued under Allina and therefore cannot be used as the sole basis for enforcement action.

The critical question—according to the Memorandum—is whether the enforcement action can be brought absent the guidance document. Where such actions cannot be brought absent a guidance document, then the guidance document establishes a norm and implicates the notice-and-comment requirements of Allina.

The Memorandum notes that Local Coverage Determinations (LCDs) do not implicate the Allina requirements as they merely reflect payment determinations, are not binding on HHS and therefore do not establish or change substantive legal standards. Under Allina, however, LCDs may not be used as the sole basis for enforcement actions. Similarly, the Memorandum clarifies that neither Stark Law advisory opinion nor statutorily-authorized fraud and abuse waivers would require notice-and-comment rulemaking.

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While CMS has not commented on the Memorandum, the Memorandum ends with an assurance that legal counsel will continue to work with CMS to “identify particular guidance documents that might be appropriate to issue through notice-and comment-rulemaking on a more expedited basis.”

Consequently, there may be an uptick in guidance documents being pushed through the notice-and-comment process so as to stand as the basis of enforcement actions. We will continue to monitor and provide updates accordingly. In the meantime, if you have any concerns with your compliance with federal fraud and abuse law or the contents of this alert, please contact any member of our health care department, including the authors of this alert.


DOJ, Individual Liability, Settlements

DOJ Settlement Resolves Allegations of Individual Liability

On October 4, 2019, the U.S. Attorney’s Office for the Central District of California announced a settlement in which the Retina Institute of California Medical Group, its former CEO, and several of its physicians paid the United States and California approximately $6.65 Million to settle False Claims Act allegations.  The settlement related to accusations of billing for unnecessary eye exams, improperly waiving Medicare co-payments, and violating other regulations.

 Between January 2006 and August 2017, the retinal group allegedly billed public health programs by misclassifying simpler exams as being more complex and using billing codes for patients with severe or emergency conditions. The retinal group also allegedly waived Medicare co-payments and deductibles without proper documentation of financial hardship and without reasonable collection efforts, which was viewed as intending to induce referrals.  Finally, the Department of Justice’s press release note that the defendants allegedly billed Medicare and Medicaid for “medical services that weren’t performed, were unnecessary, not documented in the medical record or were not in compliance with applicable rules and regulations.”

The arrangement described above was uncovered as a result of a whistleblower claim filed by Bobbette Smith and Susan Rogers who worked for the retinal group as administrators.  The case was initially filed in 2013 and unsealed in 2016.

The settlement serves as yet another reminder of the Department of Justice’s increased focus on individual liability and refusal to allow the resolution of allegations against a corporation to provide protection to individuals accused of engaging in wrongdoing.  These principles – memorialized in the September 2015 Yates Memo – have resulted in a significant uptick in the number of cases brought against corporate executives and settlements involving the resolution of individual liability.



HHS to Ease Fraud and Abuse Rules Part 5: CMS Proposes Value-Based Arrangement Stark Exceptions

As discussed in an Oct. 9 alert, the Department of Health and Human Services announced two proposed rules to significantly amend the Physician Self-Referral Law (Stark Law), the federal Anti-Kickback Statute and the Civil Monetary Penalties Law. This client alert, the fifth in McGuireWoods’ summary series on these proposed rules, focuses on the Centers for Medicare & Medicaid Services’ (CMS) three proposed Stark Law exceptions aimed at reducing the regulatory burdens that healthcare providers long have claimed prevented value-based payment model adoption. Stark Law is a strict liability statute, which prohibits a physician from referring a Medicare beneficiary for designated health services (DHS) to an entity with which the physician has a financial relationship, unless that financial relationship meets all of the delineated requirements of an applicable exception.

The Stark Law proposed rule stems from HHS’ Regulatory Sprint to Coordinated Care (discussed in a Sept. 26, 2018, client alert), which outlines the agency’s desire to incentivize value-based arrangements and patient-care coordination by expressly permitting certain activities that could be deemed problematic under current law. CMS’ proposed changes to Stark Law were released on the same day the HHS Office of Inspector General (OIG) proposed new value-based arrangement safe harbors under the Anti-Kickback Statute, to be discussed in a forthcoming alert.

CMS indicated that it seeks to adopt the new value-based arrangement Stark Law exceptions to address the transition away from traditional fee-for-service reimbursement to value-based reimbursement and care-coordination incentives. HHS has granted certain limited fraud and abuse waivers for participants in various value-based and care-coordination initiatives to avoid the strict liability of the Stark Law when a value-based financial relationship would not meet an exception. These waivers, however, do not apply to commercial payor-led or provider-driven activities that nonetheless could implicate the Stark Law, including certain capitation, shared savings, gainsharing and bundled payment programs. CMS and HHS developed this proposed rule to address worries that these restrictions impeded the goals of the Regulatory Sprint.

The following summarizes eight key aspects of the proposed Stark Law changes, intended to reduce regulatory hurdles and afford healthcare providers greater flexibility when participating in a value-based enterprise (VBE).

Three new value-based exceptions. The financial risk assumed by the parties to a VBE would dictate which of the three exceptions would apply to a particular arrangement, with additional safeguards required for arrangements that carry less financial risk for providers. Each of the proposed exceptions would protect remuneration made to a physician by other participants in a VBE, regardless of payor, if it fits the applicable exception’s requirements. A key feature of each of these exceptions is that they do not include the traditional requirements for existing Stark Law exceptions that payments be commercially reasonable, consistent with fair market value, and not vary based on the volume or value of referrals. Instead, as discussed below, each exception would have its own requirements, provided that the VBE is organized as a group of providers, suppliers and other actors collaborating to achieve at least one value-based purpose (as discussed further in point two below). The three types of VBE for which exceptions have been proposed are distinguished as follows:

Full financial risk. The VBE prospectively takes on full financial risk from a payor for all patient care and services related to a target patient population for a specified time period.

Meaningful downside financial risk. The VBE places meaningful downside financial risk on the physician VBE participant for failing to achieve the value-based purpose. CMS proposed “meaningful downside” to mean either where 25 percent of remuneration value paid under the arrangement is at risk or where the physician is prospectively responsible for the cost of all or a defined set of patient-care items for each patient in the target patient population.

General VBE arrangement. The VBE adopts other value-based arrangements to achieve a value-based activity meeting the requirements discussed in this alert, but which provide only potential financial upside for a physician participant.

New exceptions would allow remuneration involving referrals. Due to the nature of value-based arrangements, the proposed exceptions would not prohibit remuneration conditioned on referring patients included in the VBE’s target patient population. For example, if the value-based arrangement focuses on joint replacements, these exceptions would allow conditioning remuneration to the physician on referring joint replacement treatment to certain facilities (but notably would not permit a requirement that the physician refer all of his or her orthopedic patients to such facility). VBE participants could then receive remuneration based on these referrals if the remuneration furthers the value-based purpose.

As noted above, this is a departure from many existing exceptions prohibiting payments that vary based on the value or volume of DHS referrals or other business generated between the physician and a DHS entity. CMS noted it is considering including a volume/value variation limitation in the general VBE arrangement exception, citing its concerns that value-based arrangements utilizing this exception are more susceptible to abuse of Medicare or patients because the parties do not assume any meaningful downside financial risk. In addition, any physician remuneration conditioned on referrals needs to satisfy CMS’ longstanding policy within the Stark Law that excludes from such referral requirements patient or insurance preference, and the best interest of the patient.

Certain requirements would apply to all three proposed exceptions. Each of the three exceptions proposed by CMS must meet the following universal requirements.

Remuneration must relate to activities achieving a value-based purpose. In order for a VBE to qualify for an exception, VBE participants would need to engage in certain care activities for a specific target population with the aim to achieve one of the following proposed value-based purposes: (a) coordinating and managing the care of a target patient population; (b) improving the quality of care for a target patient population; (c) reducing the costs to, or growth in expenditures of, payors without reducing the quality of care for a target patient population; or (d) transitioning to payment mechanisms based on quality of care and control of costs of care for a target patient population.

Notably, this proposed definition of “value-based purpose” could be seen as vague in light of CMS’ stated desire to permit a wide variety of efforts, ranging from mandatory post-discharge meetings, to incentives to reduce unnecessary care or shared-savings payments. Note that CMS sought feedback to refine its position, and has specifically requested comments on whether it should mandate that the VBE achieve quality of care goals before pursuing cost-sharing. Expect commenters to go beyond addressing CMS’ requested feedback and ask CMS whether specific arrangements satisfy CMS’ meaning of activities achieving value-based purposes.

Prohibition on inducements that reduce medically necessary treatment. CMS sought to safeguard the provision of items or services that are medically necessary, recognizing that VBEs, which include financial downside, could encourage patient-care stinting (underutilization). Though CMS noted that other Medicare regulations ensure patient safety and quality of care are maintained, the proposed exceptions would prohibit remuneration as an inducement to limit or reduce the provision of medically necessary services or items to any patient, even non-Medicare beneficiaries and those outside the target patient population.

Record retention. CMS proposed requiring VBE participants to record the methodology and actual amount paid under a value-based arrangement for a six-year period and make such records available upon request to the HHS secretary. As CMS noted, its regulations already require record retention for certain prongs of the Stark Law “group practice” definition and certain exceptions like those for physician recruitment (although those requirements do not mandate a specific retention period).

Key differences among the exceptions. Overall, CMS believed that the value-based arrangement exceptions needed “fewer ‘traditional’ requirements to ensure the arrangements they protect do not pose a risk of program or patient abuse … [as] value-based health care delivery and payment system[s] itself provides safeguards.” That said, as noted above, the proposed exceptions provided the fewest requirements for VBEs assuming full financial risk “with the requirements increasing and changing as the level of financial risk in the value-based arrangement diminishes.” In this manner, there are unique requirements for the three exceptions due to their respective structures.

Duration of risk. CMS proposed that VBEs be at risk (whether full or meaningful downside, depending on the applicable exception) during the entire duration of the value-based arrangement. Arrangements that begin compliant with the applicable exception but continue to a time when such financial risk no longer exists, such as a circumstance where risk-sharing ends, would no longer receive protection under the applicable exception, and would require a different exception to comply. CMS did propose, however, to allow VBEs to utilize the full financial risk exception for six months prior to achieving full risk on the VBE.

Remuneration set in advance. While the full financial risk exception does not require that the methodology for determination of remuneration be set in advance, CMS proposed a set-in-advance requirement under the meaningful financial risk exception and the general VBE arrangement exception. CMS noted that, for purposes of these exceptions with lower or no risk-sharing, a prospective methodology must be determined before healthcare providers furnish the items or services for which the remuneration is provided. CMS did not, however, mandate the actual aggregate remuneration amount to be set in advance or even be fair market value.

Signed writings. Most Stark Law exceptions require signed writings documenting a particular arrangement. CMS did not propose a signed writing requirement for the full financial risk exception (beyond a governing document or contract for the VBE), but would mandate a written description for the meaningful financial risk exception and a signed writing for the general VBE arrangement exception. This latter signed writing requirement would require VBEs to describe (i) the value-based activities to be undertaken, (ii) the activities furthering the value-based purposes of the VBE, (iii) the target population, (iv) the type or nature of the remuneration, (v) the methodology to determine remuneration and (vi) the performance or quality standards measured against the remuneration recipient.

Performance or quality standards. CMS acknowledged the need for monitoring of performance and quality standards to ensure the VBE is furthering its value-based purpose. It sought comment on how best to require VBEs to monitor these standards and when the failure to meet such standards should negate the ability to use the applicable Stark Law exception.

New exceptions would protect only compensation arrangements. CMS proposed to protect only compensation arrangements to which a physician is a party, and not any direct ownership relationships or distributions associated with such ownership. In excluding ownership, CMS indicated that receiving a return on investment is not a value-based activity, so a physician’s return on an investment interest in a VBE would not qualify for protection under a value-based arrangement exception. Notably, protected indirect compensation arrangements could include unbroken chains of financial arrangements which include both ownership and compensation arrangements between parties, provided that the financial relationship in the chain closest to the physician is a compensation arrangement that meets a value-based exception, even if other ownership relationships exist elsewhere in the chain of financial relationships. CMS sought comment on these and other formulations that commenters are likely to respond to during the open comment period.

Remuneration may be nonmonetary. CMS proposed that the value-based exceptions protect nonmonetary remuneration in addition to monetary remuneration. This would provide VBEs the opportunity to offer physician participants remuneration such as electronic health record items and services, care-coordination services, and shared staff to promote value-based activities. CMS sought comments on two alternatives here. In the first alternative, CMS proposed limiting the protection of the general VBE arrangement exception to nonmonetary remuneration only, as OIG is doing in its Anti-Kickback Statute proposed rule, and sought comment on whether such a limitation would inhibit the transition to a value-based healthcare system. In the second alternative, CMS proposed requiring physicians to pay 15 percent of the cost of nonmonetary remuneration, as the electronic health record donation exception currently requires, which McGuireWoods lawyers addressed in part three of this series on Nov. 1, 2019.

Price transparency. CMS noted it is also considering whether to include price transparency provisions in these exceptions in response to recent bipartisan actions and administration executive orders promoting price transparency. Such provisions could require physicians to alert patients that their out-of-pocket costs for items and services can vary across referral locations. CMS believed providers would likely be allowed to meet this requirement through signage or patient consent forms.

VBE participants. As mentioned above, VBEs are organized groups of providers, suppliers and other actors who collaborate to achieve at least one value-based purpose. To be clear, the “enterprise” would not need to be a single legal entity; rather, it could be a network of providers or a series of contracts among providers. VBEs would need an accountable body or person responsible for financial and operational oversight, and must have a governing document describing how VBE participants intend to achieve their value-based purposes.

Notably absent from the definition of VBE participant are certain providers and suppliers, including pharmaceutical manufacturers and suppliers of durable medical equipment, prosthetics, orthotics and supplies, as well as laboratories, pharmacy benefit managers and wholesalers; each would be unable to make payments to a physician pursuant to one of the new exceptions. CMS noted that while this formulation would effectively exclude a direct compensation arrangement between a physician and one of these provider or supplier entities, it would not prevent such providers and suppliers from participating in or contributing to a VBE (provided they are not making payments to physicians). This decision was due to CMS’ belief that these entities lack direct patient contacts and play a minimal role in patient-centered care and ongoing concerns relating to fraud and abuse. CMS sought comment on their exclusion. Expect these provider entities to advocate for their inclusion in response to the proposed rule, which CMS appeared to request by asking for feedback on how such entities could participate in value-based arrangements.

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Through these proposals, CMS sought to balance a need for innovation in the health system with the potential for improper inducements prohibited by the Stark Law, by creating three new value-based arrangement exceptions. CMS aligned its proposal with OIG’s proposed Safe Harbors relating to value-based arrangements, to be discussed in a forthcoming alert. These proposed value-based arrangement exceptions would provide greater flexibility for providers to enter into non-conventional compensation arrangements aimed at rewarding value and care coordination while attempting to provide meaningful safeguards to protect against patient and program abuse. Overall, many providers will likely support these changes, notwithstanding that providers may have desired fewer requirements to meet the proposed Stark Law exceptions.

The proposed changes are subject to a public comment period, open until Dec. 31, 2019. Please do not hesitate to contact a McGuireWoods attorney or one of the authors of this alert for more information regarding these proposed rules or for assistance in preparing a comment to them. After the open comment period, the government will review and may finalize the rule with any desired changes to reduce Stark Law burdens on providers as soon as early 2020.

Given the significance of these proposed changes, McGuireWoods plans to provide additional analysis and summaries on these proposals. To review previous guidance on these proposed rules, click on the links at the bottom of McGuireWoods’ Oct. 10, 2019, alert.


OIG Redesigned Hotline Webpage

The Office of Inspector General (“OIG”) recently launched a new, redesigned hotline webpage to better guide the public through the tip and complaint reporting process. The OIG hotline operations accepts tips and complaints from all sources regarding potential fraud, waste, abuse, and mismanagement in the U.S. Department of Health and Human Services’ (“HHS”) programs. The OIG receives nearly 115,000 complaints each year. Much of this information, as reported in the OIG’s promotional video, has led to thousands of referrals for further action. Therefore, the OIG stated it is imperative that users understand the complaint and submission process, which it hopes the updated webpage will help facilitate. The OIG’s updated hotline webpage creates a more user friendly environment and a better experience for the complainants.

On the new website, users can find guided questions, mobile compatibility, and more information regarding the types of complaints that the OIG investigates. The updated hotline page includes a section titled “What You Need to Know.” This section contains a link to information for the complainant to review before they submit a complaint. The information on found at this link includes a list of the types of claims the OIG investigates and a list of complaints not addressed through the OIG hotline. The new hotline website lists the following as the types of complaints it investigates: (1) Complaints for HHS employees, grantees or contractors about fraud, waste, abuse or mismanagement in HHS programs (whistleblower complaints); (2) crime, gross misconduct, or conflicts of interest involving HHS employees, grantees or contractors; (3) fraud, waste, or abuse relating to HHS grants or contracts; (4) false or fraudulent claims submitted to Medicare or Medicaid; (5) kickbacks or inducements for referrals by Medicare or Medicaid providers; (6) medical identity theft involving Medicare and/or Medicaid beneficiaries; (7) failure of a hospital to evaluate and stabilize an emergency patient; (8) abuse or neglect in nursing homes and other long-term-care facilities; and (9) human trafficking by HHS employees, contractors or grantees to include procuring a commercial sex act. There is also information regarding what is needed for the complaint, privacy safe guards, what to expect after a complaint is submitted, and how to appeal an OIG hotline operations complaint decision.

In addition to submitting a complaint online, complainants may also forward their tip via phone or mail, as indicated on the updated website. However, the OIG notes in its promotional video, that online complaint submission is preferred because of the efficiency. It also allows individuals the opportunity to submit supporting documents, along with their complaints. Supporting documents cannot be submitted via the other types of complaint submissions.

The OIG emphasized the importance of the updated Hotline website, by stating that the new site will provide complainants with much more information than they previously had available to them. The updated site will guide complainants in filing complaints that the OIG can act on. The OIG stressed that, while they are not able to provide complainants with a status on their tip or complaint, the complainants’ role is very important, and the OIG would be unable to stamp out fraud, waste, and abuse without their assistance.

Given the OIG’s focus on increasing the simplicity in allowing the public to notify it about potential fraud and abuse issues, we will not be surprised if there is a quick and significant increase in the number of complaints filed.  This, in turn, could lead to increased investigatory activity by the OIG. We will continue to provide updates as the OIG publishes information about its updated hotline.


Updated Civil Monetary Penalties

The Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 requires agencies to adjust civil monetary penalties for inflation annually. Effective November 5, 2019, the Department of Health and Human Services released updated civil monetary penalties for the regulations its agencies are responsible for enforcing.

Below are key changes applicable to healthcare providers.

  1. The physician self-referral law, commonly known as the Stark Law, imposes civil monetary penalties for referring certain designated health services to an entity in which a physician has a financial relationship and for billing for those services. In 2018, the penalty per claim was a maximum of $24,748. The annual adjustment for 2019 increases this to $25,372 per claim.
  2. The federal anti-kickback statute imposes civil monetary penalties for knowing and willful solicitation, receipt, offer, or payment of remuneration for referring an individual for a service or for purchasing, leasing, or ordering an item to be paid for by a Federal health care program. In 2018, the penalty per violation was a maximum of $100,000. The annual adjustment for 2019 increases this to $102,522.
  3. The Civil Monetary Penalty Law also prohibits offering remuneration to induce beneficiaries of Federal health care programs to use particular providers, practitioners, or suppliers. In 2018, the penalty per violation was a maximum of $20,000. The annual adjustment for 2019 increases this to $20,504.
  4. The False Claims Act prohibits knowingly presenting or causing to be presented a false or fraudulent claim under to the federal government. In 2016 (when the dollar amounts were last updated), the penalty for violating this prohibition was $10,000 per claim. The 2019 adjustment increases this to $10,461. The False Claims Act also prohibits making, using, or causing to be made or used a false record or statement material to a false or fraudulent claim. In 2016, the penalty for violating this prohibition was $50,000 per violation. The 2019 adjustment increases this to $52,308.

As always, healthcare providers should be mindful of the landscape of regulatory requirements that govern their business. The penalties for violations are large, and, as demonstrated by this 2019 update, the federal government is consistent in increasing the potential liability.


Changes to CMS’ Conditions of Participation Regulations for Providers Take Effect Nov. 29

Healthcare providers should begin finalizing plans to implement the Centers for Medicare and Medicaid Services’ Omnibus Burden Reductions (conditions of participation) final rule, which becomes effective Nov. 29, 2019. The final rule, issued Sept. 26, 2019, is intended to remove Medicare regulations, contained primarily in providers’ conditions of participation that CMS has identified as unnecessary, obsolete or excessively burdensome on healthcare providers and patients. The rule finalizes the provisions of three distinct proposed rules:

  • Regulatory Provisions to Promote Program Efficiency, Transparency, and Burden Reduction (Omnibus Burden Reduction), published Sept. 20, 2018
  • Hospital and Critical Access Hospital Changes to Promote Innovation, Flexibility, and Improvement in Patient Care, published June 16, 2016
  • Fire Safety Requirements for Certain Dialysis Facilities, published Nov. 4, 2016

The final rule represents a continuation of CMS’ Patients Over Paperwork initiative to reduce regulatory burdens on the healthcare industry, as discussed in a July 9, 2019, McGuireWoods client alert.

CMS estimates that, within the first year of implementation, the changes made by the final rule will save providers and suppliers an estimated 4.4 million hours previously spent on paperwork and roughly $8 billion per year over the next 10 years. The final rule contains many revisions that impact a wide array of providers.

Below are key changes applicable to four specific provider types.

1) Hospitals

Upon implementation of the final rule, CMS will permit a hospital system (defined as a system consisting of two or more separately certified hospitals subject to a system governing body legally responsible for the conduct of each hospital), to elect to have a unified and integrated Quality Assurance and Performance Improvement (QAPI) program for all of its member hospitals subject to compliance with state and local laws. This change is intended to help hospitals increase efficiencies and eliminate some duplication of efforts

In the final rule, CMS also gave hospitals increased flexibility to establish a medical staff policy describing the circumstances under which such hospital can utilize a pre-surgery/pre-procedure assessment for an outpatient, instead of a comprehensive medical history and physical examination. If a hospital elects to establish such a policy, its pre-surgery/pre-procedure assessment must consider patient age, diagnoses, the type and number of surgeries and procedures scheduled to be performed, comorbidities, and the level of anesthesia required for the surgery or procedure, among other requirements. CMS believes these changes will benefit providers and patients by providing administrative and financial relief from current comprehensive pre-operative testing requirements, which are often unnecessarily performed on patients, particularly those patients undergoing only minor outpatient procedures.

2) Ambulatory Surgical Centers (ASCs)

In the final rule, CMS removed from the conditions for coverage (CfCs) requirement that ASCs either (i) have written hospital transfer agreements in place or (ii) require their medical staff physicians to have admitting privileges with a local hospital. While CMS will no longer mandate these requirements, the CfCs will still require ASCs to have an effective procedure for the immediate transfer of patients requiring emergency medical care beyond the capabilities of the ASC, to a local hospital that meets Medicare requirements for payment for emergency services.

As support for removal of the written hospital transfer agreement requirement, CMS noted the current requirement is unnecessary, obsolete and burdensome in light of the small number of patient transfers, existing requirements under the Emergency Medical Treatment and Labor Act, and the exhaustive administrative paperwork and negotiation burden that is required when a local hospital system refuses to sign the written hospital transfer agreement. Despite the removal of this requirement, CMS emphasized that it still believes it is important for ASCs and hospitals to communicate and encourages ASCs and hospitals with “functional working relationships” to maintain written transfer agreements. Further, CMS expects each ASC to periodically provide the local hospital with written notice of its operation and patient population served, including details such as hours of operation and the procedures that are performed in the ASC.

3) Transplant Centers

In response to concerns that present reporting requirements for transplant centers have resulted in fewer eligible patients receiving transplants, CMS’ final rule removed the requirement for transplant centers to submit data, clinical experience and outcome requirements for Medicare re-approval. CMS believes the removal of these requirements will lead to improved patient outcomes, increased transplantation opportunities for patients on the wait list, improved organ procurement for transplantation, greater organ utilization and reduced burden on transplant programs. CMS also noted that the removal of these requirements directly aligns with the U.S. Department of Health and Human Services’ Advancing American Kidney Health initiative, which seeks to increase access to kidney transplants, as discussed in a July 12, 2019, McGuireWoods client alert.

The rule does not make any changes to the QAPI program for transplant centers and CMS expects transplant programs to continue use their QAPI programs to monitor qualify of care, evaluate transplant activities and conduct performance improvement activities, as necessary.

4) Emergency Preparedness Requirements

Medicare and Medicaid providers and suppliers are now required to review and provide training on their emergency programs biennially, instead of annually, with the exception of long-term care facilities, which will still be required to review their emergency programs and provide training annually. Despite this change, CMS still expects facilities to update their emergency preparedness program more frequently than biennially if circumstances trigger the need for such an update — for example, if staff changes occur or lessons are learned from a real-life event or exercise. CMS believes these changes will give providers more flexibility to review and revise their plans based on their actual operational needs.

Bottom Line

The final rule offers regulatory relief to a wide array of healthcare providers. In addition to the categories discussed above, the rule includes a significant number of changes for home health agencies, hospices, comprehensive outpatient rehabilitation facilities, portable X-ray services, critical access hospitals, dialysis facilities and religious nonmedical healthcare institutions. Providers should review their existing policies and procedures to ensure they have revised them to implement the changes required under the final rule.

For more information regarding the new rule, please consult one of the authors.

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