The 21st Century Cures Act (“Cures Act”) was enacted in December of 2016.  Among other things, the Cures Act includes provisions to encourage the interoperability of electronic health records. Specifically, the Cures Act provides for civil penalties for those who engage in “information blocking”.  The Cures Act defines “information blocking” broadly as a “practice that . . . is likely to interfere with, prevent, or materially discourage access, exchange or use of electronic health information” if that practice is known by a developer, exchange, network, or provider as being likely to “interfere with, prevent, or materially discourage the access, exchange, or use of electronic health information”.  42 U.S.C. §300jj-52(a).  The penalty for vendors is up to $1 million “per violation”.

The Office of the National Coordinator for Health IT is reported to be currently working on a draft rule on information blocking – which many hope will address a number of issues including guidance that: distinguishes between information blocking and technology implementation issues; provides for a standard for when a practice is “known” or should have been known; and describes how the “per violation” will be defined and applied.  Although there has been some suggestion that the proposed rules will be released prior to the end of the year, the Director of the Office of the National Coordinator has not indicated when he thinks the proposed rule will be released.

The state-action antitrust exemption grew out of the 1943 decision of Parker v. Brown, 317 U.S. 341 (1943), in which the Supreme Court explained that “nothing in the language of the Sherman Act or in its history suggests that its purpose was to restrain a state or its officers or agents from activities directed by its legislatures.”  And, relying on principles of federalism, the Supreme Court gave deference to the state as a sovereign body.

Subsequent decisions expanded the reach of state-action to state and local governmental agencies (including counties and municipalities), as well as private parties.  In California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97 (1980), the Supreme Court held that the actions of state and local governmental agencies was exempt if they were undertaken pursuant to a clearly articulated state policy.  Also in Midcal, the Supreme Court ruled that private parties could take cover under this exemption if they acted pursuant to a clearly articulated state policy and were actively supervised.

However, the federal enforcement agencies have become increasingly frustrated with what, in their view, are the adverse competitive consequences of state-action, particularly as it relates to the health care industry. And, over the years they have actively pursued cases designed to shape and narrow this judicially created exemption.  For example, based on cases brought by the Federal Trade Commission, the Supreme Court clarified that only activity that is undertaken pursuant to a “clearly articulated and affirmatively expressed” state policy to displace competition, and is the “foreseeable result” of what the state authorized, can be covered by state-action, see FTC v. Phoebe Putney Health Sys., 568 U.S. 261 (2013), and, more recently, the Supreme Court agreed that even activities of a state agency (such as a state licensing board) must be actively supervised before state-action can apply if the agency is dominated by market participants, see N.C. State Bd. of Dental Exam’rs v. FTC, 135 S. Ct. 1101 (2015).

And the assault on state-action continues. Maureen K. Ohlhausen, the acting Chair of the Federal Trade Commission (until confirmation of Joseph Simon), in a recent speech given at the George Washington University Law School entitled Competition Policy at the FTC in the New Administration, indicated that the Commission will continue to “work to define and confine the anticompetitive effects that flow from state action.”  And earlier in November, the Federal Trade Commission and the Antitrust Division of the Department of Justice jointly filed an amicus brief in the United States Court of Appeals for the Ninth Circuit in the matter of Chamber of Commerce v. City of Seattle (Appeal No. 17-35640), seeking to convince the Court (in a case to which neither federal agency is a party) to apply an extremely narrow interpretation of conduct covered by a Seattle ordinance regulating the provision of taxi services.

The bottom line is that as a matter of stated policy, the federal antitrust enforcement agencies will continue their pursuit to limit application of the state-action exemption, and parties looking to rely on state-action to insulate their activity from antitrust challenge should take note. Attacks on other judicially created antitrust exemptions, and to the extent possible, Certificate of Need and Certificate of Public Advantage statutes, will also continue.

There has been a growing trend of strategic joint ventures throughout the healthcare industry with the goal of enhancing expertise, accessing financial resources, gaining efficiencies, and improving performance in the changing environment. This includes, for example, hospital-hospital joint ventures, hospital-payor joint ventures, and hospital joint ventures with various ancillary providers (e.g., ambulatory surgery, imaging, home health, physical therapy, behavioral health, etc.). Extra precautions need to be taken in joint ventures between tax-exempt entities and for-profit companies.

The Internal Revenue Service (“IRS”) issued a final adverse determination letter revoking a general acute care hospital’s 501(c)(3) status. Although various details have been redacted, it is clear that the hospital entered into a lease agreement with a for-profit entity in a manner found to be incongruent with its exempt status.

The hospital leased its land, property, and equipment to the for-profit, which specialized in operating rural hospitals. Control of the hospital’s operations (including revenue collection) was given to the for-profit. The for-profit agreed to provide charity care in a manner that was to be consistent with the hospital’s past practice.

IRS § 1.501(c)(3) states that an organization must be organized and operated exclusively for one or more exempt purposes. The regulations further note that an organization is not exempt if it fails to meet either the organizational or operational test. Although an argument was made that the for-profit served an exempt purpose by maintaining the hospital’s land, building, and equipment in order to ensure that it would be available to the public, the IRS noted that there was not enough information to sufficiently make the facts at hand analogous to the authorities that support serving such an exempt purpose.

Ultimately, the IRS revoked the hospital’s status because it was not operated exclusively for a tax-exempt purpose. The lease agreement resulted in the for-profit deriving private benefit that is inconsistent with tax exemption. The IRS noted that the hospital operated in a manner materially different than what was originally represented in the Application of Exemption. Sometime in the 1990s the hospital first transferred management and then operational control to the for-profit. Even though the lease agreement had a provision on providing charity care, the IRS focused on the lack of control the hospital had over its own operations.

In giving an example of a permissible and not-permissible level of control, the IRS brought up the two hospital examples provided in Rev. Rul. 69-545. The IRS stated that the hospital in this instance is more similar to the non-exempt hospital described in Situation 2 of Rev. Rul. 69-545, which was controlled by physicians who had a substantial economic interest in the hospital. By comparison, the exempt hospital in Situation 1 was controlled by independent civic leaders who comprised the board of trustees.

The IRS highlighted Rev. Rul. 98-15, which explored how a joint venture may operate between a non-profit and a for-profit. The IRS further noted that the arrangement between the hospital in this situation and the for-profit missed the mark. The Revenue Ruling on joint ventures makes it clear that the tax-exempt organization must retain control of the joint venture. Safeguards from Rev. Rul. 98-15 (as noted by the IRS) include the following components in the governing documents of a limited liability company formed to run a hospital:

  • The limited liability company will be managed by a governing board that has three individuals chosen by the hospital and two individuals chosen by the for-profit partner.
  • Language that effectively prevents the for-profit from amending the governing documents.
  • Requirement that the hospital be operated in a manner that furthers charitable purposes by promoting health for the broad cross section of its community.
  • Conflict language that states in the event of a conflict between the community benefit standard and any duty to maximize profits, the community benefit standard must win (without regard to the consequences of maximizing profitability).

As joint ventures in the healthcare industry become more prevalent, this final adverse determination letter highlights the importance of properly structuring joint ventures between for-profit entities and tax-exempt organizations by taking into consideration this and other guidance, including Rev. Rul. 98-15 and St. David’s Health Care Sys. v. United States, 349 F.3d 232 (2003).

Perspectives on Health Care and Life Sciences advisory by Bob Atlas, President of EBG Advisors, Inc. 

Following is an excerpt:

The U.S. Senate and House of Representatives have both passed their tax reform bills and will now confer toward creating a unified bill that both chambers can support, and that President Trump will sign. The two bills differ in some key respects, but their implications for health care are already rather clear. Some aspects of the legislation explicitly touch health care, while other effects would be indirect. Overall, it appears that most of the changes would adversely affect many health care industry participants, especially those in the nonprofit sector that would not gain from the reduction in the corporate tax rate that is the central feature of the legislation. …

Read the full post here or download a PDF of this piece.

The National Defense Authorization Act (“NDAA”) – passed in late 2016 – provides numerous changes to military health care. One of the changes, NDAA Sec. 706, establishes the Military-Civilian Integrated Health Care Delivery Systems – a sweeping new change for the Defense Health Agency (“DHA”) and the Military Treatment Facilities (“MTFs”) to provide health care services for non-active duty beneficiaries through partnerships with the private sector.

These private sector partnerships require the Secretary of Defense by January 1, 2018, to enter into Memoranda of Understanding (MOU) and contracts between the MTFs and:

  • Health maintenance organizations
  • Health care centers of excellence
  • Public or private academic medical institutions
  • Regional health organizations
  • Integrated health systems
  • Accountable care organizations, and
  • Other health systems as the Secretary of Defense considers appropriate.

This is an opportunity for these organizations to provide health care to the military dependents and retirees either in its own facilities utilizing capitated payments, bundled payments, or pay for performance. NDAA Section 706 makes clear that the covered beneficiaries are eligible to enroll in and receive medical services under the private sector components of the military-civilian integrated health delivery systems listed above. Of course, the health care services must be comparable to the quality of services received by beneficiaries at an MTF.

What is the purpose of the Military-Civilian Integrated Health Care Delivery System?

The Military-Civilian Integrated Health Care Delivery System is designed to improve access to health care and outcomes while enhancing the health care experience for beneficiaries. And the NDAA provides for the sharing of resources – such as staff, equipment, and training assets – between the Department of Defense (“DoD”) and the private sector to carry out the integrated health delivery systems. Importantly, services within the MTF that are essential for the maintenance of the DoD operation medical force readiness skills of health care providers must be maintained and members of the Armed Forces must be provided additional training opportunities to maintain these skills.

What will be included in the Military-Civilian Integrated Health Care Delivery System?

There are 9 major elements in the Military-Civilian Integrated Health Care Delivery System:

  1. Deliver high quality health care as measured by leading national health quality measurement organizations;
  2. Achieve greater efficiency in the delivery of health care by identifying and implementing within each such system improvement opportunities that guide patients through the entire continuum of care, thereby reducing variations in the delivery of health care and preventing medical errors and duplication of medical services;
  3. Improve population-based health outcomes by using a team approach to deliver case management prevention, and wellness services to high-need and high cost patients;
  4. Focus on preventive care that emphasizes:
    (A) Early detection and timely treatment of disease;
    (B) Periodic health screenings; and
    (C) Education regarding healthy lifestyle behaviors;
  5. Coordinate and integrate health care across the continuum of care, connecting all aspects of healthcare received by the patient, including the patient’s health care team;
  6. Facilitate access to health care providers, including
    (A) After-hours care;
    (B) Urgent care; and
    (C) Through telehealth appointments when appropriate;
  7. Encourage patients to participate in making health care decisions;
  8. Use evidence based treatment protocols that improve the consistency of health care and eliminate ineffective, wasteful healthcare practices; and
  9. Improve coordination of behavioral health services with primary health care.

Overall, these elements seek to provide high quality care more effectively and efficiently with a focus on providing preventative care as well as convenient access to providers.

The Medicare Payment Advisory Commission (“MedPAC”) met in Washington, DC on November 2-3, 2017. The purpose of this and other public meetings of MedPAC is for the commissioners to review the issues and challenges facing the Medicare program and then make policy recommendations to Congress. MedPAC issues these recommendations in two annual reports, one in March and another in June. MedPAC’s meetings can provide valuable insight into the state of Medicare, the direction of the program moving forward, and the content of MedPAC’s next report to Congress.

As thought leaders in health law, Epstein Becker Green monitors MedPAC developments to gauge the direction of the health care marketplace. Our five biggest takeaways from the November meeting are as follows:

  1. MedPAC refines an alternative to MIPS.

MedPAC discussed the potential implementation of a new value-based program, described as a voluntary value program (“VVP”), for clinicians in Medicare fee-for service (“FFS”) if the Merit-based Incentive Payment System (“MIPS”) is eliminated, as was proposed by MedPAC in its October meeting. The VVP would encourage clinicians to form voluntary groups that would receive payment depending on the group’s overall performance. MedPAC did not anticipate recommending restrictions on the size or markup of the voluntary group beyond a minimum threshold, which would depend on specific quality measures, clinician specialties, and attribution rules. MedPAC also discussed the potential of a CMS-established voluntary fallback group for isolated or low-volume clinicians who want to join a group. With respect to different quality measures on which the VVP would reward payments, MedPAC proposed that Congress focus on measuring population-based outcomes, patient experience, and cost. Lastly, to incentivize clinicians to switch from the Medicare FFS, MedPAC proposed that any policy should cap the total value payment as to make it less attractive than an alternative payment model.

  1. MedPAC recommends rebalancing Medicare’s physician fee schedule towards primary care services.

MedPAC expressed concern that the current physician fee schedule disfavors primary care practice, often underpricing primary care relative to other Medicare health care services, and thus potentially contributing to the decrease of primary care clinicians. In response, MedPAC proposed two approaches towards rebalancing the fee schedule in favor of primary care services. The first approach would increase fee schedule payments for primary care clinicians and psychiatric services provided by all specialties and clinicians. The payment increase would be distributed on a per service basis, to achieve the goal of spreading the increased dollars among clinicians. Eligible primary care services would include: evaluation and management codes for office visits, home visits, and visits to patients in long-term care settings; chronic care management and transitional care management codes; and “Welcome to Medicare” visits and annual wellness visits.

The second approach would increase fee schedule payments for primary care and psychiatric services provided only by certain specialties and certain clinicians within those specialties. Payment increases could be distributed either on a service-by-service basis or on a per beneficiary basis. While the former may incentivize more discrete primary care visits, the latter would encourage non-face-to-face care coordination and would be consistent with MedPACs 2015 recommendation to Congress. However, as the size of a per beneficiary payment increases, questions would arise about how to attribute patients and whether to risk-adjust the payments.

  1. MedPAC makes payment policy recommendations for non-competitively bid DMEPOS.

MedPAC discussed the proposed recommendations it intends to make to the Centers for Medicare and Medicaid Services (“CMS”) to address the durable medical equipment, prosthetics, and orthotics (“DMEPOS”) fee schedule rates, which MedPAC finds to be excessive. As proposed, the recommendations would shift more DMEPOS products currently paid on a fee schedule basis to a competitive bidding program (“CBP”). MedPAC’s recommendations also call for immediate reduced payment rates for certain non-CBP products while CMS works on incorporating them into the CBP. Alternatively, MedPAC recommends a policy option that aligns balance billing and participation rules for DMEPOS suppliers with the rest of Medicare and that further protects beneficiaries. This policy option would have CMS consider capping balance billing at a percentage of the fee schedule rate and reducing the allowed amount by five percent for non-participating suppliers.

  1. MedPAC makes coverage-gap discount policy recommendations for biosimilars in Medicare Part D.

Consistent with its 2016 recommendations and the Chairman’s draft recommendation, MedPAC’s proposed policy for Part D would have the manufacturing coverage gap discount apply to both originator biologics and biosimilars, which currently applies only to originator biologics. However, the discount would no longer apply to the beneficiary’s out-of-pocket spending for either originator biologics or biosimilars. MedPAC believes that the standardized use of the coverage gap discount will better align the incentives. Because the discount would no longer distort price signals between the two products, there would be slightly lower plan liability for biosimilars than originator biologics, therefore incentivizing sponsors to put the lower-priced biosimilars on their formulary. This change would also result in Medicare paying lower reinsurance. Although some enrollees would have higher cost sharing, cost sharing above the out-of-pocket threshold would be eliminated, creating a hard cap. Because prices for biologics have been outpacing Part D as a whole, MedPAC anticipates the hard cap would become more valuable over time.

  1. MedPAC provides principles for evaluating the expansion of Medicare’s coverage of telehealth services.

This month is MedPAC’s third and last address to Congress’ mandate concerning telehealth expansion under Medicare. MedPAC discussed three principles that policy makers should consider when evaluating telehealth services or policies for potential incorporation into the FFS Medicare program: 1. increased access; 2. improved quality; and 3. reduced costs. Through examples, MedPAC appears to recommend (1) expanding telehealth services into urban areas; and (2) covering direct-to-consumer (“DTC”) services across all areas and for all beneficiaries. According to MedPAC, Medicare’s coverage of urban telehealth and DTC services would increase beneficiary access and convenience, especially in areas with certain service coverage shortages (i.e., stroke specialists, mental practitioners). For programs like telestroke, MedPAC notes that expanding access would likely improve quality by reducing mortality or more serious disability. MedPAC acknowledges that expanding telehealth services may increase costs, and noted that policy makers would need to decide whether the benefits in access and quality that result from telehealth services justify the extra costs of those services.

MedPAC also briefly reported its take on FFS Medicare’s telehealth service expansion for Medicare Advantage (“MA”). Rather than changing the MA program or its payment policy, MedPAC focuses on addressing the question of whether the Medicare benefit should be the same regardless of whether a beneficiary enrolls for FFS Medicare or MA. One option would keep the benefit between FFS Medicare and MA the same. Another option would allow MA plans to include telehealth services in their bids, thereby making the Medicare payment for telehealth services included in the program’s base payment and not financed by rebate dollars. This would mean all plan members would have access to the telehealth benefits, but not be able to opt out in exchange for lower premiums.

In response to Republicans’ failure to repeal the Affordable Care Act (ACA), the Trump Administration is using administrative action to modify the ACA and health insurance options for Americans. On October 12, 2017, President Trump signed an executive order that instructs various departments to consider regulations related to association health plans and short-term insurance. Shortly after, the Administration announced that they would no longer make cost sharing reduction (CSR) payments to insurers on the Exchanges.  Section 1402 of the ACA requires insurance companies to reduce the amount that eligible low-income policyholders pay out of pocket for co-payments and deductibles.  Accordingly, the federal government must reimburse insurers for reductions when the Secretary of HHS is notified.

Without these payments, insurers will either increase premiums or pull out of the Exchanges altogether. In anticipation of the announcement, some insurers have already increased premiums for the 2018 enrollment period. In spite of this, policy makers can mitigate the harm that could be felt as a result of not funding CSR payments.

The Passage of the Murray-Alexander Stabilization Bill

Senator Lamar Alexander (R-TN), Chairman of the Senate Committee on Health, Education, Labor, and Pensions (HELP) and Ranking Member Senator Patty Murray (D-WA) revealed a bipartisan plan to help stabilize the insurance market. The Murray-Alexander Bill seeks to stabilize the insurance market by funding the CSR subsidies and increasing state flexibility in their administration of the Marketplace.

The bill proposes to fund CSR payments for the remainder of 2017, as well as 2018 and 2019. The bill also reduces the time for the Center for Medicare and Medicaid Services (CMS) review of 1332 waivers, from 180 days to 90 days and creates a new 45 day expedited review process for qualifying circumstances. Through Section 1332 waivers, states are allowed to implement insurance market innovations that provide coverage “comparable” in benefits and affordability.

The Congressional Budget Office (CBO) scored the Murray-Alexander Bill and found that it would cut the federal deficit by $3.8 billion in the next decade. The CBO notes that savings would come from states offering lower-cost policies, attracting younger and healthier individuals into the market.  Insurers would lower their premiums because of the influx of younger individuals and in the long-term, save the government more than $1.1 billion in premium tax credits. Despite the savings scored by CBO, the Murray-Alexander bill will not have an affect on 2018 plans. Further, the bill may not pass before open enrollment ends on December 15.  The bill has bipartisan support in the Senate, but will have difficulties in the House because of Speaker Paul Ryan’s opposition to the current version.

State Efforts

States can play a role in telling insurers where to apply their premium increases. For example, states could tell insurers to apply premiums to only Silver marketplace plans, all metal level plans inside and outside the marketplace, or all Silver plans inside and outside the marketplace. About 30 states assumed that CSR payments would not be disseminated and either encouraged or required states to increase premiums onto marketplace silver plans only. States that choose this option allows consumers in the marketplace to receive premium tax credits and consumers outside the marketplace to not experience any increase in premiums. Additionally, some legal scholars and health policy experts argue that states could pay for the premium themselves and then bill the federal government.

Legal Challenges

Eighteen states and the District of Columbia sued the Trump Administration seeking an immediate injunction to block President Trump from ending CSR payments to insurers. California federal judge, U.S. District Judge Vince Chhabria, denied the motion for an injunction.  Judge Chhabria argued that states had enough time to plan for the end of the cost-sharing payments and adjusted accordingly. Although Judge Chhabria has denied the injunction, California Attorney, General Xavier Becerra, will still proceed with the lawsuit.

Despite the Trump Administration’s attempt to unravel parts of the ACA, states and Congress are working to anticipate more downstream impacts and must act to find solutions or ways to mitigate the issues that will arise for low-income policy holders.

Stakeholders should anticipate a continuation of unstable markets as insurers will have to adjust their rates or leave the Exchanges if there are no changes made to fund CSR payments. State regulators will have to use creativity and flexible ways to help their constituents.

In an Advisory Opinion dated October 20, 2017, to Crouse Health Hospital (“Crouse Hospital”), the Federal Trade Commission (“FTC”) agreed that the Non-Profit Institutions Act (“NPIA”) would protect the sale of discounted drugs from Crouse Hospital to the employees, retirees, and their dependents of an affiliated medical practice (Crouse Medical Practice, PLLC) (“Medical Practice”) from antitrust liability under the Robinson-Patman Act.  Significantly, the FTC provided this advice despite the fact that the Medical Practice is a for-profit entity, and is not owned by Crouse Hospital.

The Robinson-Patman Act is primarily a consumer protection statute that prohibits, among other things, discrimination in the sale of like kind products, including pharmaceuticals, to different buyers.  As a result, and absent some exemption, the resale of discounted drugs purchased by a not-for-profit hospital to its patients would be subject to challenge.

The NPIA, however, exempts from the reach of the Robinson-Patman Act the sale of discounted drugs to “schools, colleges, universities, public libraries, churches, hospitals, and charitable institutions not operated for profit,” provided those drugs are purchased for that entity’s “own use”.  15 U.S.C.A. § 13(f). The Supreme Court, in Abbott Laboratories v. Portland Retail Druggists Ass’n, 425 U.S. 1 (1976), defined “own use” to mean “what reasonably may be regarded as use by the hospital in the sense that such use is a part of and promotes the hospital’s intended institutional operation in the care of persons who are its patients.”  Id. at 14.  The Supreme Court went on to conclude, among other things,  that the resale of discounted drugs to a hospital’s employees and their dependents would qualify as the hospital’s “own use.”  The FTC, in a number of prior Advisory Opinions, further extended the application of the NPIA to the sale of discounted drugs to employees of hospital affiliates, and other similar entities.  However, those entities were generally not-for-profit entities, likely eligible for protection under the NPIA on their own, and owned and/or controlled by the hospital.

The Advisory Opinion to Crouse Hospital is unique in that the Medical Practice is a for profit entity and clearly would not be eligible for protection on its own under the NPIA.  Furthermore, the Medical Practice is not directly owned by Crouse Hospital calling into question whether the resale could qualify as the hospital’s “own use” as required by the NPIA.

Despite these facts, the FTC concluded that NPIA should apply to the resale of discounted drugs to the employees, retirees, and their dependents of the Medical Group because: 1) Crouse Hospital was responsible for the formation of the Medical Practice and did so “to develop an integrated medical service system to encourage both organizations to work together to improve care and promote the charitable purposes of Course Hospital”; 2) Crouse Hospital, despite not owning the Medical Practice, still had ultimate decision-making control and authority over the Medical Practice; and, 3) all profits earned by the Medical Practice were assigned to Crouse Hospital.  Based on these factors, the FTC determined that “Crouse Medical Practice is an integral part of Crouse Hospital’s ability to fulfill its intended institutional function of providing care and promoting community health,” and, therefore, the resale was for Crouse Hospital’s own use.

Hospitals and health systems should take note that simply because an affiliate is a for profit entity does not automatically mean NPIA protection does not apply. A deeper look into the relationship between the hospital and affiliate, and consideration of the affiliate’s mission may support an extension of the NPIA.

New rules issued on November 7, 2017 by FDA will make it easier for companies to offer certain types of genetic tests directly-to-consumers (DTC), without a health-care provider intermediary.

The first rule exempts “autosomal recessive carrier screening gene mutation detection systems” that are offered DTC from FDA premarket review.  FDA first proposed this exemption in 2015, on the same date as the agency issued a final order classifying these types of tests as Class II medical devices, in response to a request from 23andMe.  The 2015 final rule specified the conditions under which all companies could offer autosomal recessive carrier tests directly to the public.  By finalizing the exemption, FDA is permitting companies to offer these tests DTC without the need for prior FDA review.  These companies will still be subject to general requirements applicable to all medical device manufacturers, as well as to the “special controls” specified by FDA for these types of tests in the final rule.

Similarly, the second rule finalizes a new medical device classification for  DTC “genetic health risk assessment” (GHR)  (i.e., predictive) tests.  The classification specifies the conditions under which these tests may be marketed, and includes the requirement for a 510(k) premarket notification to FDA. However, in a Federal Register Notice, also issued yesterday, FDA proposes to exempt GHR tests from the 510(k) premarket submission requirement after a company has successfully obtained FDA clearance of its first GHR assay, and provided that the company continues to follow the specified special controls for this class of tests.  Comments to this proposed exemption are being accepted by FDA until January 8. 

Please reach out to Gail Javitt or the Food and Drug Law practice team members for additional information.

On November 1, 2017, the Centers for Medicare & Medicaid Service (“CMS”) released the Medicare Hospital Outpatient Prospective Payment System (“OPPS”) final rule (“Final Rule”), finalizing a Medicare payment reduction from Average Sales Price (“ASP”) + 6% to ASP – 22.5%, for 340B discounted drugs in the hospital outpatient setting, as was proposed in the OPPS proposed rule earlier this year. This payment reduction is effective January 1, 2018, and would primarily impact disproportionate share hospitals, rural referral centers, and non-rural sole community hospitals.

340B Program Generally

The 340B program, established by section 340B of the Public Health Service Act by the Veterans Health Care Act of 1992, generally allows for certain eligible health care providers (“Covered Entities”) to purchase outpatient drugs at discounted prices. The 340B program is administered by Health Resources and Services Administration (“HRSA”).

CMS Policy Background for the Final Rule

In response to reports of the growth of 340B drug utilization by hospital providers, as well as the recent trends in high and growing prices of several separately payable drugs administered under Part B, CMS reexamined the appropriateness of the ASP +6% payment methodology to 340B drugs. This policy change as finalized would allow the Medicare program and beneficiaries to pay less for outpatient drugs, in a way that more closely aligns Medicare payment for 340B drugs to the resources expended by hospitals in acquiring such drugs. Additionally, CMS did not believe that beneficiaries should be responsible for a copayment rate tied to ASP + 6% when the actual cost to acquire the drug under the 340B program is much lower than the ASP for the drug.

340B Drug Payment Reduction

Under the Medicare program, CMS generally reimburses separately payable outpatient drugs and biologics based upon a drug’s ASP as reported by its manufacturer, plus a 6% markup, regardless of whether the drug is purchased at a 340B discount price. Drugs that are not separately payable are packaged into the payment for the associated procedure and no separate payment is made for them.

Effective January 1, 2018, CMS will reduce this payment rate to ASP – 22.5% for non-pass-through separately payable drugs and biologics acquired with a 340B discount. Excluded from this payment reduction are drugs or biologics that have pass-through payment status (which are required to be paid under the ASP + 6% methodology), or vaccines (which are excluded from the 340B program). In the proposed rule, CMS contemplated excluding blood clotting factors and radiopharmaceuticals from this payment reduction, however, CMS has decided to subject these two product types to the new policy. CMS noted that this ASP – 22.5% payment rate is based upon a 2015 MedPAC report in which MedPAC estimated that, on average, hospitals in the 340B Program “receive a minimum discount of 22.5 percent of the [ASP] for drugs paid under the [OPPS].”

Certain types of hospitals will not be affected by the change. CMS has exempted Covered Entities that are rural sole community hospitals, children’s hospitals, and cancer hospitals from this 340B drug payment reduction policy. Additionally, critical access hospitals are not affected by this policy because they are not paid under the OPPS. CMS has stated this payment reduction does not apply to 340B drugs furnished at non-excepted off-campus provider based departments.

To implement this payment reduction, CMS will be utilizing a claims modifier to track whether a drug is a 340B-acquired drug, and another claims modifier for whether the Covered Entity is exempt from this payment reduction policy. Hospitals will be required to report modifier “JG” with the associated nonpass-through separately payable drug’s HCPCS code to identify whether the drug was acquired with a 340B discount. The rural sole community hospitals, children’s hospitals, and cancer hospitals exempt from this payment reduction policy will be required to report the modifier “TB” with the associated HCPCS code of the 340B-acquired drug.

Additional Considerations

It is important to note that this new payment reduction policy generally does not apply to 340B drugs dispensed at contract pharmacies. Drugs reimbursed under the Medicare OPPS are generally physician administered drugs, whereas drugs dispensed at a contract pharmacy are generally self-administered retail drugs. Furthermore, this payment reduction policy does not affect 340B drug reimbursement for non-hospital Covered Entities, such as Federally Qualified Health Centers and Ryan White Grantees.

While HRSA manages the 340B program, this payment reduction is specifically for drugs reimbursed under the Medicare program. Accordingly, this policy does not affect reimbursement of 340B drugs by other government or private payers. However, it is possible that the Final Rule may embolden other payers to follow suit by adopting 340B payment reductions similar to CMS.

Organizations representing hospitals already have announced intent to take legal action against this 340B drug payment reduction. This legal action will likely focus on arguments that CMS exceeded its statutory authority in its ability to calculate and adjust 340B acquired drug payment rates, and doing so in a manner that discriminates against safety net hospitals violates the Medicare statutes.

The OPPS Final Rule will be published in the Federal Register on November 13, 2017 and available online at https://federalregister.gov/d/2017-23932. Epstein Becker & Green is available to provide guidance on how this new policy affects you.