Health Law Advisor

Thought Leaders On Laws And Regulations Affecting Health Care And Life Sciences

Zika Update – WHO Declares Public Health Emergency

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On Monday, the World Health Organization (“WHO”) declared the rise in birth defects linked to the Zika virus outbreak a public health emergency, marking only the fourth time that the WHO has made such a declaration. This announcement by the WHO underscores the seriousness of the Zika virus outbreak and, hopefully, will pave way for a coordinated and well-funded global response to this serious public health problem that may include intensified mosquito control efforts, expedited creation of a more rigorous diagnostic test to detect the virus, and development of a preventive vaccine.

Reports of the Zika virus first surfaced in the Western Hemisphere in May 2015. The Zika virus outbreak has now spread to 25 countries and territories worldwide. The U.S. Centers for Disease Control and Prevention (“CDC”) said no locally-transmitted cases have been reported in the continental United States. However, symptoms of the illness have been reported in travelers returning from affected countries, including a student at the College of William and Mary in Virginia who contracted the virus while traveling in Central America over winter break. That student is expected to recover.

Experts have suggested that the Zika virus, spread by mosquitoes, may explain a recent a surge in neurological disorders and the birth defect microcephaly, occurring when infants exposed to the virus are born with abnormally small heads and incomplete brain development. WHO officials have said that confirmed clusters of these problems, rather than exposure to the Zika virus itself (which usually causes very mild symptoms of illness), are what led to Monday’s declaration.

As elements of a global public health response are debated and take shape, health care providers must consider the various professional and business challenges associated with having to deal with infectious diseases such as the Zika virus. This may include health regulatory and risk management issues associated with developing a response strategy, and potentially labor and employment considerations facing health care employers.

EBG is carefully following the latest developments on the Zika virus and will provide updates on how it may impact your business.


Network Adequacy: A Multimarket Recap of 2015 and Looking Ahead

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2016 is poised to be a major year in network adequacy developments across public and private insurance markets.  Changes are ahead in the Medicare and Medicaid managed care programs, the Exchange markets and the state-regulated group and individual markets, including state-run Exchanges.  The developing standards and enforcement will vary significantly across these markets.

Through 2014 and 2015, major news stories discussed concerns over the growing use of narrow provider networks by issuers on the Affordable Care Act’s insurance exchanges (“Exchanges”).  Others reported on enrollees’ frustration with receipt of unexpected charges from out-of-network practitioners when receiving treatment at in-network facilities (often referred to as “surprise bills”).  As a result, calls for improved network adequacy and transparency mounted.  A September 2014 HHS Office of Inspector General (OIG) report was critical of variation in state oversight of the Medicaid managed care market.  An August 2015 Government Accountability Office (GAO) report called for greater CMS network oversight in the Medicare Advantage market.  In response, a series of proposed rules and other changes have accumulated –

Medicare Advantage (MA) – In April 2015, CMS announced in a Call Letter that it will impose more stringent network adequacy requirements in the application process for MA plans.  To address surprise provider terminations, CMS will require 90 days notice of any significant mid-year changes.  Additionally, plans must establish and maintain a process to keep provider directories current in real-time.  CMS intends to monitor compliance and is considering a CY2017 requirement for standardized electronic submission for inclusion in a nationwide provider database.  CMS has also expressed its intent to review network adequacy as part of its regular program audits, as a pilot in 2016 and as a standard feature in 2017.

Medicaid Managed Care – In May 2015, CMS released the first proposed rule to make comprehensive changes to its Medicaid managed care rules in 12 years, including new quantitative network adequacy standards.  Once finalized, states would be required to establish time and distance standards for specific provider types, including primary care (adult and pediatric), OB/GYN, behavioral health, specialists (adult and pediatric), hospital, pharmacy, pediatric dental, and any “additional provider types when it promotes the objectives of the Medicaid program for the provider type to be subject to such time and distance standards.”[1]  Interestingly, CMS suggested in its proposed rule that states look to MA and state commercial standards as models.

Federal Exchanges – In December 2015, CMS, through its Center for Consumer Information and Insurance Oversight (CCIIO), released a proposed rule that featured more prescriptive network adequacy standards for Qualified Health Plans (QHPs) offered on the federal Exchange.  Where CCIIO is satisfied that a state uses “an acceptable quantifiable metric,” it will defer to their review of QHPs.  In other states, a default federal standard would apply.  Starting in 2017, CMS expects to take a similar approach as to MA and apply time and distance standards, with an emphasis on high-utilization specialties.  While CMS says it will not “prohibit certification of plans with narrow networks or otherwise impede innovation in plan design,”[2] it intends to set a floor with the federal Exchange default standards and it seeks greater network transparency.  Toward that end, ratings on QHP network coverage may be a future feature of

State Regulated Group and Individual Markets – In November 2015, the National Association of Insurance Commissioners (NAIC) released a long-awaited network adequacy model act with more detailed requirements than federal and many state standards.  While the act would not impose quantitative standards such as provider number and type requirements, it does include reimbursement parity provisions for emergency and out-of-network facility-based providers.

Looking Ahead

With legislative sessions underway in all but four states this year, there are several important developments to watch for in 2016.  Some states will adopt the NAIC model act, in whole or in part, or use the act as a baseline from which to tailor its own standards.  Other states will decline to adopt it, leaving existing standards intact that range from minimal to highly detailed and prescriptive.  With increasing pressure from CMS across markets, some states may seek to aggressively increase the specificity of their network adequacy standards, adding number and type requirements or legislating that their insurance commissioners do so through an administrative process.  Some states may consider aligning standards across markets to ensure regulatory uniformity.  While there is nothing in the model act that suggests states increase oversight and enforcement activities, CMS is clearly increasing its own oversight and is pushing states to set a floor for state level access standards.  Changes to the landscape will come better into focus as CMS releases its final rules for all of the above proposed changes.


[1] 80 Fed. Reg. at 31145.

[2] 80 Fed. Reg. at 75550.

Physician Owned Labs Affiliating with Hospitals

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Hospital-physician practice acquisitions represent a large segment of the very active healthcare mergers and acquisitions market, which will likely continue in 2016.[1]  In New York, an acquiring hospital often forms a new professional corporation owned by one or more hospital-based physicians to acquire the business and operations of a group physician practice in an asset purchase. The acquiring hospital will be able to exercise a level of management and control over the new professional corporation, often referred to as a “captive PC”, through a contractual arrangement with the captive PC.  This captive PC structure is used to comply with New York’s corporate practice laws as well as to allow the group practice to continue operations as a separate entity but with close business ties to the hospital, e.g. with respect to participation in the hospital’s managed care contractual arrangements and access to other resources of the hospital system.  Although the captive PC structure is conducive to allowing the physician practice to continue its day to day operations largely unchanged, the transaction parties need to be aware that any clinical laboratories that were owned by the group practice will need to comply with a much more robust set of regulations following the sale to the captive PC.[2]  These changes will affect clinical laboratories offering, among other services, bacteriology, endocrinology, genetic testing, oncology, toxicology, transplant monitoring, urinalysis, and urine pregnancy testing.

As a general rule, all clinical laboratories operating in New York State must be authorized by the Clinical Laboratory Evaluation Program (“CLEP”) unless they fall within one of the enumerated statutory exceptions of N.Y. Public Health Law § 579.1.  As is relevant here, clinical laboratories operated by a licensed physician who performs lab tests or procedures “solely as an adjunct to the treatment of his or her own patients” are exempt from CLEP certification.  Instead, such physician-owned labs are certified and inspected by the Physician Office Laboratory Evaluation Program (“POLEP”).  This exemption is applicable only to labs that are operated by an individual health care provider or an independently owned and managed partnership or group practice.[3]  Both CLEP and POLEP have advised that when a lab is purchased by a captive PC, that laboratory no longer qualifies for the exemption even though the captive PC would be owned by physicians and the lab would continue to be used as before by physicians in the treatment of their patients.  The agencies have advised that, instead, it would constitute a clinical lab because of the control that the agencies believe the hospital may exert over the lab through its control over the captive PC.[4]  Due to the change in status of the laboratory post-sale, the POLEP certifications held by the labs will not be transferable to the captive PC as part of the transaction.  Accordingly, a hospital[5] that intends utilize a captive PC model to purchase the assets of a physician practice which include one or more laboratories should consider beginning the lab certification process before the transaction is complete to ensure the correct licensure is in place. [6]

Labs that only perform tests classified by federal regulations as waived[7] or provider-performed microscopy procedures[8], and for which POLEP previously issued a Clinical Laboratory Improvement Amendments (CLIA) Certificate of Waiver, will need to obtain a Limited Services Laboratory Registration from CLEP once transferred to the captive PC.[9]  This process is relatively straightforward.  The main requirement is for the hospital to submit an application, which is available online, indicating its current CLIA number.[10]

If, however, a lab will perform moderate and/or high level clinical or forensic testing[11], the lab must obtain a valid clinical laboratory permit from CLEP which is a detailed process that can take a significant amount of time depending on the quality of the lab.  Before applying for a new permit, the director of the lab must obtain a valid certificate of qualification.[12]  To do so, the director must meet certain minimum qualifications in the applicable area of testing and must demonstrate to the department that he or she possesses the “character, competence, training, and ability to administer properly the technical and scientific operation of a clinical laboratory.”[13]  The required director qualifications differ for each category of service that the lab may offer.  For example, an applicant for a certificate of qualification in oral pathology must either be a physician who is currently certified by the American Board of Pathology in anatomic pathology, or a dentist who is currently certified by the American Board of Oral Pathology.[14]  Often, the applicable qualifications will require four years of experience in an acceptable laboratory, including two years of experience with the methods and techniques to be conducted under the director’s supervision.[15]  A laboratory director may be employed at multiple labs, however, the director must disclose all other employment on the permit application, and must accurately report the hours he or she will spend on-site in each lab for every day of the week.

Beyond the requirements for lab directors, an application for a CLEP permit requires a disclosure of ownership statement, a $1,100 registration fee, and creation of a Health Commerce System (HCS) account for access to the Electronic Proficiency Test Reporting System and CLEP’s online permit information management system, eCLEP.[16]  The disclosure of ownership statement requires that all direct and indirect ownership and financial interests in the facility be disclosed, which would require disclosure of an affiliated hospital buyer of the captive PC.[17]

POLEP and CLEP recognize that transitioning from once agency to another can be a lengthy and burdensome process.  Accordingly, under circumstances in which the CLEP permit application process is not completed before a lab is transferred to the captive PC, CLEP has advised that it will generally permit the captive PC lab to continue conducting operations under its prior POLEP certification post-transaction until CLEP certification is obtained, provided the POLEP certification does not expire in the interim.[18]  The captive PC lab must submit written notification on its letterhead to POLEP indicating that a change of ownership has occurred.[19]  However, continued operation under a prior POLEP certification post-transaction, even if temporary, is not without risk to the lab and the captive PC since they are technically operating without the required CLEP license.  Such risk includes the possibility of revocation or suspension of a certification or other disciplinary action.[20]  Additionally, if the POLEP certification expires during the pendency of the lab’s CLEP application, the lab must cease all operations until a valid permit is obtained.  The operation of a clinical laboratory without a valid permit is a misdemeanor, punishable by imprisonment of up to one year, a fine of up to $2,000, or both.[21]

It is imperative that any hospital utilizing a captive PC to acquire a physician practice with a lab begin the CLEP certification process outlined above as early as possible.  Since applications vary based upon the type of services the lab is seeking permission to perform, it is difficult to estimate the timeframe for completion of the CLEP application process.  However, given the risks associated with a lab not having adequate licensure in place, buyers should be incentivized to submit their CLEP applications well in advance of the anticipated closing date of the transaction.


[1] See Molly Gamble and Benjy Sachs, Becker’s Hospital Review, “60 Statistics and Thoughts on Healthcare, Hospital and Physician Practice M&A,” July 22, 2015, available at (last visited Jan. 11, 2016).

[2] See N.Y. Pub. Health Law § 579.1.  Although outside the scope of this blog article, the law also covers blood banks, defined as facilities that collect, process, store, and/or distribute human blood or its components or derivatives. N.Y. Pub. Health Law § 571.

[3] NYS DOH Wadsworth Center, Physician Office Laboratory Evaluation Program (POLEP), available at (last visited Jan. 11, 2016) [hereinafter POLEP website].

[4] Epstein Becker & Green, P.C. telephoned POLEP and CLEP on this topic in mid-January 2016 and was told by each agency that POLEP and CLEP are taking this position.

[5] This would also apply to a captive PC that is operated by a managed care organization (MCO) or consulting firm.

[6] “CLIA” stands for the Clinical Laboratory Improvement Amendments through which the federal Centers for Medicare and Medicaid Services (“CMS”) regulates lab testing. See CMS, “Clinical Laboratory Improvement Amendments (CLIA),” available at: (last visited Jan. 11, 2016).

[7] A “waived” test is defined by CMS as a test that is easy to perform and has little to no risk to the patient if performed incorrectly, including tests performed using a kit, device or procedure, which has been specifically designated as waived by the Food and Drug Administration. Two common examples of waived tests are blood lead screenings and rapid HIV screenings. See “New York State Guidance for following Standard Practices in Laboratory Medicine,” CLEP: Limited Service Laboratories, available at

[8] Provider-performed microscopy procedures (PPMPs) are tests requiring use of a microscope and performed by physicians, dentists or midlevel practitioners (such as nurse practitioners, nurse midwives, physician’s assistants) during the patient’s visit. These include wet mounts, potassium hydroxide (KOH) preparations, pinworm examinations, fern tests, microscopic urinalysis, fecal leukocyte examination, and certain other tests. See id.

[9] See N.Y. Pub. Health Law § § 579.3, 580.

[10] NYS DOH Wadsworth Center, “Clinical Laboratory Evaluation Program, A Guide to Program Requirements and Services”, available at (last visited Jan. 11, 2016).  Registration as a Limited Service Lab costs $200.  Id.

[11] This is a broad category that includes all laboratory tests that are not exempt as “waived” or PPMPs.

[12] 10 N.Y.C.R.R. 19.2.

[13] N.Y. Pub. Health Law § 573.

[14] 10 N.Y.C.R.R. 19.2(a)(2), (b); 10 N.Y.C.R.R. 19.3(e)(8).

[15] 10 N.Y.C.R.R. 19.2(c)(2).

[16] NYS DOH Wadsworth Center, “Certificate of Qualification Instructions”, available at  (last visited Jan. 11, 2016); see also NYS DOH Wadsworth Center, Clinical Laboratory Evaluation Program, “Disclosure of Ownership and Controlling Interest Statement Instructions”, available at (last visited Jan. 11, 2016); see also NYS DOH Wadsworth Center, “Laboratory/HCS Affiliation Request”, available at A full list of requirements is available in the N.Y. Pub. Health Law §§ 572, 573, 574, 575, and 10 N.Y.C.R.R. 58-1.1.

[17] NYS DOH Wadsworth Center, Clinical Laboratory Evaluation Program, “Disclosure of Ownership and Controlling Interest Statement Instructions”, available at (last visited Jan. 11, 2016).  Registration as a clinical lab costs $1,100. Id.

[18] Epstein Becker & Green, P.C. consulted with POLEP and CLEP on this topic in mid-January 2016 and was advised by each agency that POLEP and CLEP are taking this position.

[19] See POLEP website, supra note 2.

[20] N.Y. Pub. Health Law § 577.

[21] N.Y. Pub. Health Law § 578.

Another Setback for State Regulatory Boards: Federal Court Denies Texas Medical Board’s Motion to Dismiss Teladoc’s Antitrust Lawsuit

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On December 14, 2015, the U.S. District Court for the Western District of Texas denied the Texas Medical Board’s (“TMB”) motion to dismiss an antitrust lawsuit brought by Teladoc, one of the nation’s largest providers of telehealth services.[1]  Teladoc sued the TMB in April 2015, challenging a rule requiring a face-to-face visit before a physician can issue a prescription to a patient.  Following two recent Supreme Court cases stringently applying the state action doctrine, this case demonstrates the latest of the continued trend where state-sanctioned boards of market participants face increased judicial scrutiny with respect to the state action doctrine.

The Board Rule at Issue – “New Rule 190.8”

In April 2015 the TMB adopted revisions to various chapters of the Texas Administrative Code governing the practice of medicine.  Specifically, Section 190.8(1)(L) (“New Rule 190.8”) sets forth practices the TMB deems to be violations of the Texas Medical Practices Act and prohibits prescription of any “dangerous drug or controlled substance” without first establishing a “proper professional relationship.”  A “physician-patient relationship” is defined to require, among other things, a physical examination that must be performed by “either a face-to-face visit or in-person evaluation” (defined elsewhere to require that the patient and physician be in the same physical location).

Teladoc filed a lawsuit, alleging that New Rule 190.8 violated Section 1 of the Sherman Act, prohibiting anticompetitive agreements among competitors to restrain trade (the TMB is a group comprised of competing physicians).  Teladoc then obtained a preliminary injunction in May 2015, preventing the TMB from “taking any action to implement, enact and enforce” New Rule 190.8 until Teladoc’s claims are resolved.  In issuing the injunction, the court found that Teladoc demonstrated a substantial likelihood of success on the merits of its antitrust claims, a substantial threat of irreparable injury, that the threatened injury outweighed any damage that the injunction might cause the TMB, and that the injunction would not disserve the public interest.  The TMB then moved to dismiss, claiming, among other things, entitlement to state action antitrust immunity.

State Action Antitrust Immunity

State action antitrust immunity for professional board regulatory actions has two requirements: the actions must be conducted under “active state supervision,” and they must follow a “clearly articulated state policy” to displace competition.  The court held that the TMB could not claim state action immunity because the state did not exercise sufficient control over it.  The court did not address the second requirement.

The court’s order devotes significant attention to rejecting the TMB’s state action defense.  In North Carolina State Board of Dental Examiners v. FTC, which we previously covered, the Supreme Court reaffirmed that the state action exemption would not insulate the activities of state boards or regulatory agencies comprised of market participants absent active state supervision of the entity’s challenged conduct.

Both Teladoc and the TMB agreed that active state supervision is a state action requirement, but disagreed as to whether it existed.  The district court followed North Carolina State Board of Dental Examiners, noting that in order to constitute active supervision, “the supervisor must have the power to veto or modify particular decisions to ensure they accord with state policy.”

The TMB argued that it is indeed subject to active state supervision since its decisions are subject to judicial review by the courts of Texas, the Texas legislature, and the State Office of Administrative Hearings. The court found these purported review mechanisms to be focused on the mere validity/invalidity of rules—not allowing for an evaluation of the policies underlying the rules or bestowing the state with power to modify particular Texas Medical Board decisions to accord with state policy.  The court also rejected the TMB’s argument that state supervision exists by way of the Texas legislature’s “sunset review” process (where the legislature votes on whether there is a public need for continuation of a state agency) because the legislature has no authority to veto or modify any TMB rules.


Rules promulgated by state-sanctioned boards comprised of market participants are going to continue facing increased antitrust scrutiny when challenged in court.  These rulings continue to show that significant and meaningful state oversight mechanisms are a vital and scrutinized element for agencies seeking state action antitrust immunity. However, this case is far from over, and the TMB thus remains enjoined from implementing, enacting, or enforcing New Rule 190.8 until Teladoc’s claims are resolved.  While the Texas Medical Board has announced plans for appeal to the U.S. Court of Appeals for the Fifth Circuit, such a reversal would be highly unlikely at this point—meaning that the case can be expected to proceed into discovery and perhaps trial.


[1] Teladoc, Inc. v. Texas Medical Board, 1-15-CV-343 RP (W.D. Tex. Dec. 14, 2015) (order denying motion to dismiss).

DC Circuit: No False Claims Act Liability for Reasonable, Good Faith Interpretations of Ambiguous Regulations

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On November 24, 2015, in United States ex rel. Purcell v. MWI Corp., No. 14-5210, slip op. (D.C. Cir. Nov. 24, 2015), the District of Columbia Circuit Court of Appeals ruled that federal False Claims Act (“FCA”) liability cannot attach to a defendant’s objectively reasonable interpretation of an ambiguous regulatory provision. While outside of the health care arena, this decision has implications for all industries exposed to liability under the FCA.

In Purcell, the government alleged that false claims had been submitted as a result of certifications made by defendant MWI Corporation to the Export-Import Bank in order to secure loan financing connected with MWI’s sale of water pumps to the government of Nigeria.

As part of the loan process, the Export-Import Bank required MWI to certify that it had paid only “regular commissions” to the sales agent in connection with the transactions. Purcell alleged that non-regular commissions had been paid and that the commissions were, in fact, so great that MWI should have disclosed them as payments other than “regular commissions.”

MWI defended that the commissions it paid were at the same level it had previously paid to the agent—hence they were “regular”—and that the term was not otherwise elsewhere defined. The case was brought alleging the knowing submission of false claims for payment and the making of false statements to obtain payment of false or fraudulent claims in violation of 31 U.S.C. § 3729(a)(1) and (a)(2).

Ultimately, a jury awarded damages after finding that MWI’s certifications that it had paid only “regular commissions” were fraudulent. However, because the damages had been offset by other payments that had been made by MWI to the government, the District Court determined that there were no actual damages to be awarded. Nevertheless, because the jury found that false claims had been submitted, the Court imposed civil penalties at the then maximum amount ($10,000 per claim) for each of the alleged 58 false claims.

On appeal, MWI contended that it could not have been found liable under the FCA. It asserted that the term “regular commissions” was ambiguous and that it was entitled to its own reasonable interpretation of that term, absent notice of another meaning from the government or a court.

Holding that this presented questions of law, the Court focused on the fact that in order to be liable under the False Claims Act, a defendant must have made the false claims “knowingly”— specifically, “(1) [with] actual knowledge; (2) acting in deliberate ignorance; or (3) acting in reckless disregard.” The court held that the FCA did not reach an innocent, good faith mistake about the meaning of an applicable rule or regulation. Nor, the Court ruled, did it reach those claims made based on reasonable but erroneous interpretations of a defendant’s legal obligations. Holding that  the term “regular commissions” was ambiguous (note: no party contested that the term was ambiguous) and that there was no record evidence of any guidance from any court or relevant agency that would have suggested that the interpretation MWI made was inaccurate, the Court ruled that there was no showing of a knowing submission of a false or fraudulent claim or the making of a false or fraudulent statement in support of a false or fraudulent claim and reversed the judgment of the District Court.

Key Takeaways

MWI prevailed because its conduct was objectively reasonable given the undisputed ambiguity of the regulation and the fact that MWI acted in a customary fashion under both meanings of the word “customary.” It is significant that the Court held that these were questions of law that a judge could decide.[1]

This is of great importance to defendants, especially in the health care space where CMS and FDA regulations often are ambiguous or created ex post facto to conduct that the government decides should be considered fraudulent.  While it is generally the case that to be liable under the FCA, a defendant must have made a false claim knowingly —and the Court here is essentially reaffirming what it correctly held last year in United States ex rel. Folliard v. Gov’t Acquisitions, Inc., 764 F.3d 19, 29 (D.C. Cir. 2014) —not all circuits have issued identical holdings. Thus, if one is not concerned about extra-regulatory acquired knowledge—the thing that could potentially send what otherwise would be a case decided on motions to the jury—this is a useful and, one hopes, transferable precedent.

As significant—in light of the Department of Justice’s recently published “Memorandum Re Individual Accountability for Corporate Wrongdoing” authored by Deputy Attorney General Sally Quillian Yates,  where the focus is on the culpability of individual executives—the Purcell decision could have even broader influence.

In the civil arena, especially with regard to health care FCA cases against executives, the government is likely to advance derivative negligence theories of intent where, as usually is the case in larger companies, there is no direct participation by the individual in the alleged fraud.  Here, the strong reiteration of the three-part standard enunciated in Folliard and reiterated in Purcell ought to have a lot of value. This is especially so, since recent amendments to the FCA, including under the Affordable Care Act, have made it more difficult for defendants to get summary relief in FCA cases. That is a particular problem in cases where the government has declined intervention but relators can now more easily perpetuate litigation and pursue settlements.

Focusing on the absence of a specifically pleaded theory of culpable knowledge may prove more fruitful than trying to take advantage of jurisdictional bars that have been grossly lowered.  Doing so also helpfully implicates the Supreme Court’s teachings in Iqbal and Twombley.


[1] While the questions of law were dispositive here, there is a major caveat: The case was held properly to have gone to the jury on the question of fact as to whether MWI otherwise had been aware of what the government contended had become its new regulatory definition. While the DC Circuit ultimately held that the evidence was legally insufficient to demonstrate such tipping, the fact remains that the Court potentially left open the door  – depending on the particulars of a given case – for the government to seek to recover even where a defendant has made an “objectively reasonable interpretation of an ambiguous regulatory provision.”

Bipartisan Budget Act of 2015 – Potential Impact on Hospitals

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House Republican leaders introduced legislation on Monday, finalizing a two-year budget agreement between Congressional leaders and the White House. This legislation is currently being considered and may be up for a vote as early as Wednesday on the bipartisan budget deal.

Hospitals should note the language in Section 603 (which is on pages 35-39 of the draft bill) codifies the definition of a “provider-based off-campus hospital outpatient department” (PBD HOPD) as a location that is not on the main campus of a hospital and is located more 250 yards from the main campus.  The section defines a “new” PBD HOPD as an entity that executes a CMS provider agreement after the date of enactment of the Act and that any NEW PBD HOPD executing a provider agreement after the date of enactment would not be eligible for reimbursements from CMS’ Outpatient Prospective Payment System (PPS).

Bipartisan Budget Act of 2015

Section-by-Section Summary

We encourage hospitals to reach out to their delegation if they are concerned with any of these provisions.

U.S. District Court Vacates HRSA’s Interpretative Rule on Orphan Drugs

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On Wednesday, October 14, 2015, the U.S. District Court for the District of Columbia (the “Court”), Judge Rudolph Contreras, vacated the Health Resources and Services Administration’s (“HRSA”) interpretive rule on Orphan Drugs (“the Interpretative Rule”) as “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”[1]  As a result of the ruling, pharmaceutical manufacturers are not required to provide 340B discounts to certain types of covered entities for Orphan Drugs, even when the drugs are prescribed for uses other than to treat the rare conditions for which the Orphan Drug designation was given.[2]  This issue has been the subject of long and protracted litigation including a previous court ruling that invalidated HRSA’s Final Rule on Orphan Drugs because HRSA lacked the authority to promulgate the rule.[3] [HRSA Issues Interpretive Rule on 340b Orphan Drug in Response to Court Vacating Final Rule]

By way of background, the Affordable Care Act (“ACA”) amended the Public Health Service Act (“PHSA” or “the statute”) and expanded access to 340B discounts by creating new categories of eligible covered entities including freestanding cancer hospitals, children’s hospitals, critical access hospitals, rural referral centers and sole community hospitals.[4]  For these categories of covered entities only, the amendment also excluded drugs  “designated by the Secretary under section 360bb of Title 21 for a rare disease or condition” (“Orphan Drugs”) from the definition of covered outpatient drugs subject to mandatory 340B pricing requirements (“the orphan drug exclusion”).[5]

In the Interpretive Rule issued on July 24, 2014, HRSA narrowly interpreted the exclusion and required pharmaceutical manufacturers to provide 340B discounts to the new types of covered entities for Orphan Drugs when they are used to treat something other than the rare diseases and conditions they were developed to target.[6] In addition, HRSA sent letters to pharmaceutical manufacturers stating that failure to provide 340B discounts to eligible 340B covered entities for non-orphan uses would be deemed a violation of the statute.[7]  The lawsuit challenged HRSA’s interpretation, arguing that the orphan drug exclusion must apply to Orphan Drugs regardless of their particular use.[8]  The Court denied HRSA’s motion for summary judgment and granted PhRMA’s motion for summary judgment because it determined HRSA’s Interpretive Rule was contrary to the plain language of the statute.[9]

Analysis in the Court’s Opinion

Initially, the Court recognized HRSA’s authority to offer its interpretation of the statute and noted that PhRMA was not challenging HRSA’s authority to issue the Interpretive Rule.  Although the Court determined in the previous litigation that HRSA did not have authority under the statute to promulgate its Final Rule, the Court recognized that HRSA would need to provide interpretation of a pharmaceutical manufacturer’s obligations under the 340B Program.[10]

The Court determined that the Interpretive Rule constituted “final agency action” under the Administrative Procedure Act (“APA”).[11]  The Court focused the majority of its analysis on whether HRSA’s Interpretive Rule was “final.”[12]  Based on the two-part test set forth in Bennett v. Spear, the Court analyzed whether the action was the “consummation of the agency’s decision-making process” and whether “the action must be one by which rights or obligations have been determined or from which legal consequences will flow.”[13]  Since HHS conceded that the Interpretive Rule met the first element, the Court focused on the second element and determined that even prior to enforcement action, there were significant practical and legal burdens for covered entities and pharmaceutical manufacturers in the Interpretive Rule that impacted their business practices.  Additionally, since HRSA sent the manufacturers letters informing them that they were non-compliant with the statute unless the requirements in the Interpretive Rule were followed, potential penalties would accrue until HRSA pursued an enforcement action.[14]  The Court stated that “[h]aving thus flexed its regulatory muscle, [HHS] cannot now evade judicial review.”[15]  The Court concluded that the Interpretive Rule met the second element of the Bennett test.[16]

When analyzing the merits, the Court held that the Interpretive Rule “conflicts with the statute’s plain language.”[17]  Because of the conflict, the Court afforded the Interpretive Rule no deference.[18]   The Court relied on how Congress used the Orphan Drug terminology in other parts of the U.S. Code.[19]  Previously, in other contexts Congress included additional language to specify that the applicability was limited to occasions when the designated drug was used to treat the rare disease or condition, rather than the use of the Orphan Drug in general.  The Court noted that if it adopted the narrow meaning HRSA intended under the Interpretive Rule, the identified phrases elsewhere in the Code would be rendered superfluous based on the principle of statutory construction to give effect to every word in the statute.  Because of its conflict with the plain language of the statute, the Court held that the Interpretative Rule was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”[20]

Implications from the Decision

This decision means that pharmaceutical manufacturers are not required to provide 340B discounts on Orphan Drugs, whatever their use, to the types of covered entities added by the ACA. The Court acknowledged concerns that the amount of lost savings for these drugs could impact a covered entity’s decision to participate in the 340B Program.[21]

Additionally, this decision has implications for HRSA’s proposed Omnibus Guidance published on August 28, 2015, the comment period for which is open until October 27, 2015.  The Omnibus Guidance provides comprehensive guidance for the 340B Program. [HRSA Issues Proposed “Omnibus Guidance”].  While the Court recognized HRSA’s ability to issue interpretive guidance,[22] such guidance could be vulnerable to challenge if HRSA, after consideration of the comments submitted, finalized an Omnibus Guidance that is not consistent with the 340B statute.  Industry stakeholders should consider highlighting these types of inconsistences in the proposed Omnibus Guidance as they formulate comments for submission next week.

Finally, the recent decision might provide impetus for Congress to take legislative action.  The Court noted that it “would not rewrite the statute,” suggesting that Congress needs to take action if its intent was to limit the orphan drug exclusion.[23]  Given Congress’ recent focus on the 340B Program, it is possible that Congress could either amend the statute to clarify the orphan drug exclusion or to provide HRSA with additional rulemaking authority to allow it to address this issue and other oversight issues.

[1] 5 U.S.C. § 706(2)(A).  Pharm. Research & Mfrs. of Am. v. U.S. Dep’t of Health & Human Servs, No. 1:14-cv-01685-RC at 38 (D.D.C October 14, 2015) (hereinafter “PhRMA”).

[2] PhRMA at 36-8. HRSA may appeal the District Court’s decision within 60 days of the decision date.

[3] Pharm. Research & Mfrs. of Am. v. U.S. Dep’t of Health & Human Servs., 43 F. Supp. 3d 28 (D.D.C. 2014).

[4] Patient Protection and Affordable Care Act, Pub. L. No. 111-148, § 7101(a), 124 Stat. 119, 821–22 (codified as amended at 42 U.S.C. § 256b(a)(4)(M)–(O)).

[5] 42 U.S.C. § 256b(e).  The orphan drug exclusion does not apply to disproportionate share hospitals.

[6] HHS HRSA, Interpretive Rule: Implementation of the Exclusion of Orphan Drugs for Certain Covered Entities Under the 340B Program, (July 21, 2014),

[7] PhRMA at 10.  Additionally, the HRSA website explained that manufacturers could be subject to statutory penalties, refunds of overcharges, or termination of their Pharmaceutical Pricing Agreements. Id.

[8] Id.  at 1-2.

[9] Id. at 1-2.

[10] Id. at 12-13.

[11] The APA mandates that judicial review is permitted only when there is “final agency action.”

[12] Id. at 14, 15-27.

[13] Id. at 14.

[14] Id. at 22-26.

[15] Id. at 27.

[16] Id. at 23-27. 

[17] Id. at 2.

[18] Id. at 29.  The Court explained that if the statute were ambiguous, the Interpretive Rule was entitled to Skidmore deference, which means the Court would only follow the Interpretive Rule to the extent it is persuasive. HRSA’s Interpretive Rule would not receive Chevron deference because HRSA lacked the authority to promulgate regulations related to the orphan drug exclusion (as decided in the prior litigation).  Id.

[19] Id. at 30.

[20] Id. at 38.

[21] Id. at 36-37.

[22] Id. at 12-13.

[23] Id. at 37.

340B Program and Mega-Guidance Webinar

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Constance Wilkinson, Member of Epstein Becker Green, will co-present on a webinar on “340B Program and the Proposed Mega-Guidance” on October 22, 2015, from 2:00 – 3:00 p.m. ET.

With recent publication of the long-awaited proposed “Mega-Guidance,” the federal 340B Drug Discount Program (“the 340B Program”) is poised for significant changes. This webinar describes the 340B Program’s historical background, practices, and challenges that resulted in the proposed policies and goals reflected in the Mega-Guidance. In addition to learning about the history of the 340B Program, participants will be educated on how it works—what manufacturers and providers must do to participate in and comply with the Program, how to navigate the 340B website and database maintained by the Health Resources and Services Administration (HRSA), and what specific reforms have been proposed for public comment.

This webinar is free and is being hosted by ACI. To register, please click here.

More Time Given To Stakeholders to Respond to CMS’ Request for Information on Physician Payment Reforms

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On September 28, 2015, the Centers for Medicare & Medicaid Services (“CMS”) issued a request for information (“RFI”) seeking comments on two key components of the physician payment reform provisions included in the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), the law enacted on April 16, 2015, repealing the sustainable growth rate formula used to update payment rates under the Medicare Physician Fee Schedule.  The RFI was originally open for a 30-comment period.  However, CMS has announced that it is extending the comment period for an additional 15 days.  Comments to the RFI are now due to CMS on November 17, 2015.

The RFI included an extensive list of questions related to the implementation of the Merit-Based Incentive Program System (“MIPS”), as well as adoption and physician participation in Alternative Payment Models (“APMs”) and Physician-Focused Payment Models (“PFPMs”).  More details on the questions that CMS has raised and the areas where CMS is seeking input in the RFI are discussed in the Epstein Becker Green Client Alert, “New Opportunity to Comment on Key Components of Medicare Physician Payment Reform: CMS Issues 30-Day Request for Information on MIPS and APMs.”

Importantly, in the CMS announcement extending the public comment period released on October 15, 2015, CMS identified sections and questions in the RFI that are of higher priority to the agency.  For example, CMS has ranked questions about how physicians should be identified to determine eligibility, participation, and performance under the MIPS performance categories, and what measures and reporting mechanisms should be used for each of the four MIPS performance categories (quality, resource use, clinical practice improvement activities, and meaningful use of certified electronic health record technology), above questions about public reporting requirements, use of measures from other payment systems, and the weighting of performance categories and the determination of performance scores and thresholds.  Similarly, for questions related to the adoption of APMs, CMS has prioritized questions about how to define the amount of services furnished through an eligible APM entity, how to determine the Medicare and other payer payment thresholds used to identify qualifying and partial qualifying APM participants, and how to compare state Medicaid medical home models to medical home models expanded under Section 1115A(c) of the Social Security Act.  Given the short period of time to provide comments to CMS, stakeholders should consider the priority rankings that CMS has assigned to the various topics that it is seeking input on.

All stakeholders, not just physicians, should consider how the fundamental shift in Medicare physician payments, from traditional fee-for-service to value-based models, will impact them.  It is important to engage with CMS now by submitting comments to the RFI, in order to shape how these new payment mechanisms are implemented in the years to come.  For additional information about the physician payment reforms implemented in MACRA, or if you are interested in submitting comments to CMS, please contact Lesley Yeung or the Epstein Becker Green attorney who regularly handles your legal matters.

CMS Progress Note Template for Home Health Patients: Comments due by October 13

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In January 2015, CMS announced that it was considering developing voluntary clinical templates to help physicians adequately document their encounters with Medicare patients who receive home health services.[1] CMS initially proposed a sample paper template progress note and suggested clinical template elements for an electronic progress note. CMS hosted three Special Open Door Forums to solicit feedback on the proposed templates from physicians, home health agencies, and other interested stakeholders to provide feedback on the proposed templates.

On August 12, 2015, CMS announced that a suggested clinical template had been submitted to the Office of Management and Budget (OMB) for review.[2] Although CMS had initially proposed the creation of separate paper and electronic templates, the proposed progress note template that was submitted to OMB combines the information into one template.

The proposed template is designed as a paper progress note that includes a list of clinical elements that will allow electronic health record vendors to create prompts to assist physicians when documenting eligibility and the face-to-face encounter. The template is intended to help physicians and allowed non-physician practitioners capture necessary information, to increase compliance with Medicare requirements, and to reduce the possibility that home health claims will be denied for failure to meet Medicare requirements. CMS estimates that it will take approximately 10 minutes to complete the electronic template and approximately 15 minutes to complete the paper template.

Use of the proposed template will be completely voluntary. Physicians and home health agencies must still ensure that the patient’s medical record supports certification of the home health benefit, as the Progress Note Guidance specifies that “completion of this Progress Note alone will not substantiate eligibility for the Medicare Home Health Benefit.” However, the elements included in the proposed template do provide an indication of what CMS may consider adequate documentation of the face-to-face encounter and of a patient’s eligibility for home health services.

Public comments on the proposed template are due by October 13, 2015 and may be submitted electronically via, or by mail.

[1] Home Health Medical Review and Home Health Electronic Clinical Template.

[2] 80 Fed. Reg. 48,321 (Aug. 12, 2015).