On June 28, 2018, California legislated into law A.B. 375, otherwise known as the California Consumer Privacy Act of 2018 (“California Privacy Act”).  Effective January 1, 2020, among other requirements, the law will expand privacy rights of California consumers as well as require businesses to disclose the what, why, and how consumers’ personal information are being used.  Failure to comply with these new laws could be costly to businesses with civil penalties resulting from an action by the state attorney general of up to $7,500 per violation.  In addition, in the event of a breach of personal information, the California Privacy Act provides consumers with statutory damages of no less than $100 and no more than $750 per consumer per incident, or actual damages, whichever is greater.  Therefore, the California Privacy Act will have a significant impact on businesses, including the healthcare sector.

Business Types Affected.

Generally, the California Privacy Act will affect business entities that are for-profit business entities that collect consumers’ personal information and that meet one or more of the following criteria: (1) have annual gross revenues greater than twenty-five million dollars ($25,000,000); (2) buy, receive, sell, or share personal information of 50,000 or more consumers annually; or (3) derive 50 percent or more of its annual revenues from selling consumers’ personal information.  The law applies to businesses who collect, use, or share personal information of California residents, including those who are outside the state for temporary or transitory purposes (e.g., travelers).  California’s privacy law does not apply to protected health information regulated by California’s Confidentiality of Medical Information Act or by HIPAA’s privacy, security, and notification rules, but, it does apply to the other personal information held by an organization that meets the criteria above and doing business in California. 

Consumer Rights Expanded.

Additionally, the California Privacy Act will provide California residents more control over their personal information.  For example, consumers will have the right to know the type of personal information collected by the business, the purpose for which the information is being collected, and with whom the information is being shared with.  Also, consumers will have the “right to be forgotten” by requesting the deletion of their personal information from the businesses’ systems (with certain exceptions that may apply).  Under the new law, consumers will have the right to prohibit businesses from selling their personal information.  Furthermore, the California Privacy Act will also provide consumers protection from discriminatory action by businesses for exercising these privacy rights.  Overall, the expansion of consumers’ rights to their personal information are similar to the requirements set forth in the European Union’s General Data Protection Regulation (“GDPR”) policies.  Therefore, in this regard, the good news is that the work businesses have been doing to be GDPR compliant will most likely comport with the California Privacy Act.

Business Response Required.

Also, the California Privacy Act will mandate businesses, affected by the law, to comply with several requirements that will ensure consumers’ awareness of their privacy rights.  For example, the law will require businesses to make available at least two methods for consumers to make requests for information required to be disclosed (at a minimum a toll-free telephone number and, if applicable, a Web site address).  Businesses will be required to disclose and deliver the requested information, free of charge to the consumer within 45 days of the request (although businesses will not have to provide such information more than twice a year to a single consumer).  Furthermore, businesses will be required to ensure that all individuals handling consumer inquiries about the business’s privacy practices or the business’s compliance with the law understand all the requirements under the California Privacy Law.  Therefore, businesses will need to make sure that its online privacy policies and/or California-specific consumers’ privacy rights are updated to include these new rights.

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As mentioned above, the California Privacy Act reaches businesses beyond the borders of the state.  According to the International Association of Privacy Professionals (“IAPP”), more than 500,000 U.S. businesses (most being small- to medium-sized enterprises) will be affected by the privacy law.  Because the California Privacy Act follows in the footsteps of the GDPR, the work businesses have done to be in compliance with the GDPR will most likely comport with California’s privacy law.  But those businesses who have not, should begin making changes to their policies and procedures to ensure they are in compliance by the end of 2019.

On June 25, 2018, the Office of the Inspector General of the Department of Health and Human Services (“OIG”) published Advisory Opinion 18-05, allowing a nonprofit medical center to provide or arrange for certain support services for individuals who care for adults with chronic medical conditions (the “Opinion”).  The Opinion is significant because it helps to define the limits of recently enacted exceptions to the Civil Monetary Penalties Law (“CMP Law”).  In addition, the Opinion follows other recent guidance and regulations promulgated by OIG and the Centers for Medicare and Medicaid Services that demonstrate a trend toward permitting providers to offer various forms of caregiver assistance, including Advisory Opinion 09-01 (regarding complimentary local transportation provided by a skilled nursing facility to friends and family of residents of the facility) and Advisory Opinion 11-16 (regarding a hospital’s provision of free transportation, lodging, meals and other items and services to patients and their family members).

As described in the Opinion, the requestor is a nonprofit hospital that established a center to provide various forms of assistance to caregivers (the “Center”).  The Center is funded by a foundation affiliated with the hospital and primarily staffed with unpaid volunteers.  The Center provides, either directly or via collaborations with other local nonprofit organizations, a variety of free and fee-based services, for example:

Free Services

  • Resource library,
  • Educational sessions,
  • Support groups,
  • Respite care during Center-sponsored activities attended by caregivers, and
  • Equipment lending program.

Fee-Based Services

  • Massage therapy,
  • Low-cost ride-share programs, and
  • Additional respite care resources.

If caregivers require financial assistance for the Fee-Based Services, then volunteers of the Center connect the caregivers to financial assistance resources in the community.  If additional financial assistance is required, then volunteers provide the caregivers with the hospital’s application for financial assistance.

OIG indicated that the services provided by the Center implicated both: (1) the Anti-kickback Statute (“AKS”) – which prohibits offering “remuneration” to induce the referral of items or services reimbursable by a federal healthcare program, and (2) the CMP Law – which prohibits offering “remuneration” to a Medicare or State health care program beneficiary that is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier.  With respect to the CMP Law, OIG discussed the potential applicability of two exceptions that were created under the Affordable Care Act and further clarified by OIG in regulations promulgated in 2016 – the “Promotes Access to Care Exception” and the “Financial Need-Based Exception.”

The “Promotes Access to Care Exception”[1] permits the provision of remuneration that promotes access to care and poses a low risk of harm to patients and federal health care programs.  OIG has interpreted this exception to apply to items or services that improve a beneficiary’s ability to obtain items and services payable by Medicare or Medicaid, and pose a low risk of harm to Medicare and Medicaid beneficiaries and the Medicare and Medicaid programs by –

  1. being unlikely to interfere with, or skew, clinical decision making,
  2. being unlikely to increase costs to federal health care programs or beneficiaries through overutilization or inappropriate utilization, and
  3. not raising patient safety or quality-of-care concerns.

The “Financial Need-Based Exception”[2] permits the provision of items or services for free or less than fair market value if the items or services:

  1. are not advertised,
  2. are not tied to the provision of other reimbursable items or services,
  3. are reasonably connected to the medical care of the individual, and
  4. are provided only after a good faith determination that the recipient is in financial need.

OIG ultimately determined that the services provided by the Center did not satisfy the requirements of either CMP exception.  For purposes of the Promotes Access to Care Exception, OIG reasoned that the services did not improve a beneficiary’s ability to obtain items and services payable by Medicare or Medicaid.  For purposes of the Financial Need-Based Exception, OIG reasoned that the services were not reasonably connected to the caregivers’ medical care, even though OIG conceded that the Arrangement related to the caregivers’ general health and well-being. For similar reasons, the OIG found that none of the AKS safe harbors would apply to protect the services provided by the Center.

Although no CMP exceptions or AKS safe harbors applied, OIG nonetheless concluded that it would not impose administrative sanctions on the hospital because the following safeguards were present:

  1. The services provided by the Center are not tied to federally reimbursable services, and the Center does not recommend any particular service providers. Therefore, there is a low risk that the Free or Fee-Based Services would influence a caregiver (or the care recipient) to choose the hospital for federally reimbursable services.
  2. The services are available to all caregivers regardless of insurance or health care provider.
  3. Financial assistance is awarded on the basis of objective, standardized financial criteria.
  4. The hospital does not actively market the services or the Center in the community or in the media – all promotion is done through the hospital’s own websites and brochures.
  5. Center volunteers direct caregivers to their own providers for any medical services and provide caregivers with a list of all known providers of non-medical services in the area.
  6. The Center’s operations are unlikely to increase costs to federal health care programs because the Center’s staff is comprised of unpaid volunteers, and all of the Center’s operating costs are funded by private donations.

Advisory Opinions 18-05, 09-01, and 11-16 each demonstrate that there is a growing need for various forms of caregiver support.  In fact, in its request for the Opinion, the hospital cited to a report from the National Alliance for Caregiving and AARP Public Policy Institute called Caregiving in the U.S. 2015, which found that many caregivers suffer from physical and financial strain as a result of caring for individuals with chronic conditions, and such caregivers could benefit from various educational and support services.  Thus, providers are beginning to develop programs to address the needs of caregivers, in addition to patients.

Although this Opinion acknowledges that there are limitations to the safe harbors and exceptions that may be used to protect caregiver arrangements from regulatory scrutiny, the Opinion nevertheless demonstrates that providers may still offer certain benefits to caregivers without violating AKS and the CMP Law if appropriate safeguards are in place.

___

[1] 42 U.S.C. 1320a–7a(i)(6)(F) and 42 C.F.R. 1003.110(6)

[2] 42 U.S.C. 1320a–7a(i)(6)(H) and 42 C.F.R. 1003.110(8).

Since the inauguration of President Trump, the Affordable Care Act (ACA) has taken quite a few significant jabs and blows. When Congress failed to repeal the ACA, Congress instead eliminated the individual mandate penalty through the GOP tax bill. The individual mandate penalty was one of the main pillars of the ACA because it effectively widened the pool of participants who buy health insurance in order to keep costs down. While removal of this penalty hit the ACA where it hurt, the true threat to the stability of the ACA arose when the Trump Administration announced that it would no longer defend the ACA against a challenge filed by twenty states that believe the individual mandate itself is unconstitutional and that key parts of the act are invalid. What is the outlook for the ACA?

Congressional Efforts to Repeal

The House has voted to repeal or amend the ACA at least 50 times, but their efforts have never made it past the Senate. Despite this history of failure, there are still Republicans pushing for the repeal of the ACA.  On June 19, 2018, a coalition of conservatives released the outline of a new plan for repealing and replacing the ACA. The plan emphasizes the use of block grants, implementing risk pools, removing essential health benefits, and minimum loss ratio requirements.  As it stands, the plan will likely succumb to the fate of its predecessors.  Even if the bill passed the House, there are fewer Republicans in the Senate than the last time the repeal went to a vote. However, if after the upcoming mid-term elections the Republicans win Senate seats in Montana and Missouri and keep the majority in the House, the ACA could truly be in jeopardy.

Lawsuits

Meanwhile, twenty states have filed a lawsuit against the ACA’s individual mandate arguing that the elimination of the tax penalty without the elimination of the mandate is unconstitutional because it leaves the mandate without the exercise of Congress’s taxing power. The Supreme Court’s 2012 ruling may come back to haunt ACA proponents. The Supreme Court held that the individual mandate is constitutional because it constitutes a tax and that the ACA could not function without the mandate in place. Those filing suit argue that because the tax penalty is eliminated it is a tax-less mandate and thus unconstitutional because Congress cannot exercise its taxing power. As such, the mandate is such a key provision that the whole ACA should be thrown out if the provision cannot be severed.  In other words, the whole cannot exist without the entirety of its parts.

States Embrace Medicaid Expansion

Amid the slew of blows taken by the ACA, there is one provision left unscathed—Medicaid expansion.  The number of states expanding Medicaid continues to grow. For example, Virginia recently passed an expansion of Medicaid, and the Governor of Utah signed a Medicaid expansion bill.  Interestingly, some Republican-leaning states have embraced the expansion due in part to the current Administration’s support of work requirements. In fact, Maine is currently in a dispute with its Governor about the implementation of the expansion of Medicaid that was approved by Maine voters.

The Outlook

With the ACA constantly under attack from multiple vantage points, it is safe to say that the Act will have to fight to survive. Although heavily dependent on the November elections, it is possible that the ACA will survive additional congressional efforts to repeal the bill.  Further, the popularity of Medicaid expansion would make it difficult to repeal the bill in its entirety. More states are embracing Medicaid Expansion, and there is evidence available of the positive effects expansion has on access to care. The survival of the ACA really hinges on how U.S. District Judge Reed O’Connor interprets the law as he presides over the twenty-state suit, especially considering that the Trump Administration has already stated that it does not intend to defend the ACA. Stakeholders will have wait patiently to see how the outcome of the upcoming elections and the pending lawsuit will affect the ACA’s future.

Eighty years ago today, President Roosevelt signed the Federal Food, Drug, and Cosmetic Act (“FD&C Act”).  In recognition of this anniversary, EBG reviews how the FD&C Act came to be, how it has evolved, and how the Food and Drug Administration (“FDA”) is enforcing its authority under the FD&C Act to address the demands of rapidly evolving technology.

I’m Just a Bill

The creation of the FD&C Act stems from a sober event in American History.  In 1937, a Tennessee drug company marketed elixir sulfanilamide for use in children as a new sulfa drug.  The diethylene glycol (“DEG”) used as a solvent for the elxir is poisonous to humans.  The untested drug killed over 100 people, including children.  The public’s response to the disaster prompted and ensured the passage of the FD&C Act in 1938, which included the creation of the process known as pre-market approval, requiring that new drugs be proven safe before going on the market.

Growing Pains and Milestones

Since 1938, FDA’s jurisdiction has expanded as various public health emergencies and other challenges faced by the health care system have caught national attention.  Among the many legislative acts passed over the years, the following are of particular relevance to current developments:

(1) Food Additives Amendment of 1958, addressing safety concerns over new food additives and implementing generally recognized as safe (“GRAS”) requirements;

(2) Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman” Act), establishing the modern generic drug approval system;

(3)  Nutrition Labeling and Education Act of 1990, granting FDA authority to require nutrition labels on most foods, and compelling FDA-compliant nutrient and health claims;

(4) Safe Medical Device Amendments of 1990, giving FDA post-market device surveillance authority and device tracking capability at the user level;

(5) Dietary Supplement Health and Education Act of 1994, defining “dietary supplement” and establishing a regulatory framework for such products;

(6) Food and Drug Administration Modernization Act of 1997, making changes to several FDA regulatory schemes, including biologics, devices, pharmacy compounding, food safety and labeling, and standards for medical products;

(7) Food and Drug Administration Amendments Act of 2007, authorizing FDA to require a Risk Evaluation and Mitigation Strategy (“REMS”) to ensure that drug benefits outweigh risks;

(8) Family Smoking Prevention and Tobacco Control Act of 2009, expanding FDA authority over manufacturing, distribution, and marketing of tobacco products;

(9) Drug Quality and Security Act of 2013, expanding FDA’s authority to regulate the manufacturing of compounded drugs as a reaction to a meningitis outbreak caused by contaminated compounded drug products; and

(10) 21st Century Cures Act of 2016, creating the Breakthrough Devices Program, the Regenerative Medicine Advanced Therapy Designation, and exempting certain software products from the definition of “medical device.”

An Old Dog Learning New Tricks

Over the last few years, FDA has felt the impact of and the need to respond to several societal developments.  The country is calling for the government to address drug prices and to gain better control over access to drugs containing controlled substances, such as opioids.  The surge in development of new technology has forced FDA to adapt its historically rigid device regulatory structure to accommodate innovations such as regenerative medicine therapies.  A renewed public focus on the nutritional value of food requires updates to nutritional labeling and food safety regulations, and the new “vaping” trend raises questions surrounding the sale and promotion of new tobacco products.  Across all of these developments, there is a trend toward more focused regulatory pathways that take into account the particular needs and challenges of specific product categories.  Many of these changes are either required or authorized by legislation, such as the 21st Century Cures Act; and statements by the agency, as well as numerous new draft and final guidance documents, give indications as to where FDA is headed in the next few years.

A. Drugs

Increasing Market Competition and Access: FDA is focused on increasing market competition for and patient access to prescription drugs. In furtherance of its Drug Competition Action Plan, the agency published a draft guidance to address the exploitation of REMS and prevent problematic pay-for-delay schemes. In the same vein, FDA implemented a Biosimilar Innovation Plan to facilitate development and approval of biosimilars, hoping to increasing patient access to costly biologics. Last week, FDA also withdrew its draft guidance on biosimilar analytical studies, announcing intent to issue a revised draft guidance in the future.

Drug Development Efficiency: Recent FDA publications also suggest that the agency is prioritizing a more streamlined drug development process. In February 2018, FDA released five guidance documents emphasizing a faster, patient-focused approach for drug development for neurological conditions. In March 2018, FDA updated its benefit-risk framework to further incorporate patient experience into the agency’s regulatory decision-making process. FDA published the first of four of its patient-focused drug development guidances on June 13, 2018.

In response to the opioid crisis, FDA is focusing heavily on changes to the drug compounding and controlled substance space. In March 2018, FDA published a draft guidance on evaluation of bulk drug substances nominated for inclusion in the 503(B) bulks list, requiring a showing of clinical need. FDA also plans to issue notice of proposed regulations for outsourcing facilities later in 2018.  FDA held a Patient-Focused Drug Development Meeting for Opioid Use Disorder in April 2018 and published an associated draft guidance on buprenorphine drug development and clinical trial design issues. We expect to see more FDA movement on drug development as the year progresses, particularly with respect to opioid use disorder treatment therapies.

B. Devices

Streamlining the Device Pathway: FDA continues to implement changes to the regulatory pathway for manufacturers to bring their devices to market.  Per a draft guidance released in April 2018, the agency is expanding the abbreviated 510(k) pathway by creating a voluntary option for manufacturers when there is no acceptable predicate for a new device, but there is another device with the same intended use.  Manufacturers will be able to use the similar device as a “predicate” and demonstrate how their product conforms to newly-developed device-specific objective performance criteria.  While these performance criteria are still under development, they will eventually pave the way for more manufacturers to bring their products to market faster.

Precision Medicine: The national focus on precision medicine has encouraged many manufacturers to develop new products that incorporate genomics-based technology.  FDA is encouraging development of next generation sequencing (“NGS”)-based tests, which analyze larger sequences of the human genome, if not the whole genome, for a variety of different genetic variants.  FDA released two final guidance documents in April 2018, making recommendations on (1) the design and development of a NGS-based test for germline diseases and (2) use of public human genetic variant databases to support clinical validity of NGS-based tests and routes for establishing and justifying algorithms for variant annotation and filtering.

FDA is also evaluating its approach to the regulation of gene therapy products. Commissioner Gottlieb stated that the agency is at “an inflection point” with gene therapy thanks to increased reliability of vectors.  The focus has shifted from the efficacy of gene therapy to its durability, i.e. the long term effects of the treatment.  Recently, Commissioner Gottlieb announced FDA’s intent to start developing gene therapy guidance for products intended to treat hemophilia.

Regenerative Medicine: In efforts to implement its comprehensive policy framework for regenerative medicine and respond to certain provisions of the 21st Century Cures Act, FDA intends to create an expedited regulatory pathway for novel regenerative medicine therapies.  FDA is also actively enforcing against stem cell clinics promoting certain regenerative medicine therapies without approval and in violation of current good manufacturing practices.

Software and Artificial Intelligence (“AI”): In acknowledgment of the current “digital age,” FDA published a Digital Health Innovation Action Plan.  In April 2018, FDA released two policy documents – (1) a working model for the Digital Health Software Pre-Certification (Pre-Cert) Program Pilot and (2) guidance on regulation of digital health products with both FDA-regulated and unregulated functions.  Also in 2018, FDA authorized the marketing of AI-based clinical decision software (“CDS”) that functions to alert specialists when computed tomography (“CT”) indicates a potential stroke, as well as an AI algorithm for detection of wrist fractures.

C. Food

Food Safety: Since the Food Safety Modernization Act (“FSMA”) was passed, sixteen rules and dozens of guidances have been released (many of which have been in the last two years), bringing the law close to full implementation. These rules and guidances address the mandatory preventive controls for food manufacturing facilities; mandatory product safety standards; FDA’s new mandatory food recall authority; and the initial required inspection of over 600 foreign facilities and the subsequent requirement to “double those inspections every year for the next five years.” In light of the recent high profile foodborne illness outbreaks at chain restaurants and attributed to romaine lettuce, the agency is hoping the full implementation of the FSMA rules, in tandem with keeping food safety as a high priority for the agency, will minimize the risk of future outbreaks.

Nutrition: In 2018, the agency launched the FDA Nutrition Innovation Strategy, which, in addition to implementing new Nutrition Facts Label and Menu Labeling requirements, demonstrates that the agency is looking for more ways to modernize food labels and standards of food product identity to help consumers make healthier decisions. FDA also plans to release short-term voluntary sodium targets for food products in 2019.

Food Labeling: FDA issued a guidance in 2016 on the use of the term “healthy” in food labeling, and continues today to seek stakeholder input on how to redefine the term in such a way as will keep up with scientific advancements and help consumers understand what is in their food products.  FDA is also reviewing stakeholder input on how to define “natural,” and indicated in March 2018 that the agency will “have more to say on the issue soon.”

Dietary Supplements: The dietary supplement industry is a growing industry, and consumers are more interested in alternative products to promote wellness lifestyles. The industry is considered by some to still be the “wild wild west” in terms of enforcement, but FDA seems to be putting its foot down on companies making unsubstantiated claims about dietary supplement products or making claims that would otherwise classify the product as a drug.

D. Tobacco Products

Using its authority to regulate all tobacco products, FDA is addressing the rise in the use of vapes, vaporizers, pens and electronic cigarettes by children.  In April 2018, Commissioner Gottlieb announced the intent to issue new enforcement actions against bad actors, as well as to implement a Youth Tobacco Prevention Plan, seeking to reduce the amount of children exposed to e-cigarettes and vapes and those manufactures who target children with enticing flavors.   In May 2018, Commissioner Gottlieb stated “If you target kids, then we’re going to target you.”  FDA is also in the process of developing guidance for the development and regulation of e-cigarettes generally, suggesting that e-cigarettes could fall into the over-the-counter pathway due to their potential role in smoking cessation, and is reviewing the toxicology of the products.

Andrew Do, a Summer Associate (not admitted to the practice of law) in the firm’s Washington, D.C. office, contributed  to the preparation of this post.

On June 20, 2018, the Centers for Medicare and Medicaid Services (“CMS”) published an advance copy of a request for information seeking public input on reforms to the Physician Self-Referral Law (or “Stark Law”).

The request for information stems from on-going efforts by the Department of Health and Human Services (“HHS”) to accelerate the government’s transformation from a fee-for-service to a value-based system focused on care coordination.  Dubbed the “Regulatory Sprint to Coordinated Care” (#RS2CC), HHS expressed an intent to first identify regulatory requirements that act as obstacles to coordinated care, and then issue guidance or revise regulations to address these obstacles and/or incentivize coordinated care.

In connection with this HHS initiative, CMS acknowledged and identified that certain aspects of the Stark Law may pose potential obstacles to coordinated care.  Through their request for information, CMS seeks additional information and input from the public to help achieve their goal of “reducing regulatory burden and dismantling barriers to value-based care transformation.”  In particular, CMS has asked the public to share their thoughts and experiences related to:

  • the structure of arrangements between DHS entities that are used to effectuate alternative payment models and novel financial arrangements;
  • potential revisions to current Stark Law exceptions and key defined terms that would serve to permit or encourage the implementation of alternative payment models; and
  • the creation of new Stark Law exceptions to permit or encourage the implementation of alternative payment models.

The request for information follows a number of other administrative actions and announcements focused on reforming the current regulatory environment, particularly with respect to physician arrangements and, more specifically, the Stark Law. In January, CMS Administrator Seema Verna announced a plan to form an interagency group focused on reviewing the regulatory barriers to alternative payment models created by the Stark Law.  In addition, the Fiscal Year 2019 budget proposal, issued by the Office of Management and Budget in February, includes a proposal to reform the Stark Law to “better support and align with alternative payment models and to address overutilization.”  These more recent actions continue to build on concerns and suggestions identified in a white paper released by the Senate Finance Committee in 2016 titled “Why Stark? Why Now? Suggestions to Improve the Stark Law to Encourage Innovative Payment Models.”

This request is only the first formal step in the combined efforts of HHS and CMS to adopt what may be significant changes to the Stark Law.  However, the government appears to be poised to move quickly on regulatory reforms now that the ball is rolling, as evidenced by their branding of these efforts as a “sprint.”

Epstein Becker Green is in the process of coordinating with clients that are interested in submitting responses to the request for information.  If your organization is interested in developing comments to this request and would like assistance in these efforts, please contact Victoria Sheridan by e-mail at vsheridan@ebglaw.com or by phone at (973) 639-8296.

The final copy of the request for information is scheduled to be published in the Federal Register on June 25, 2018.

Tuesday’s decision by Judge Richard Leon of the U.S. District Court for the District of Columbia categorically approving the merger of AT&T and Time Warner, without imposing any conditions or limitations and rejecting granting a stay for appeal purposes, will, unless blocked if there is an appeal, open the way for a series of pending vertical merger deals.

A “vertical merger” is a merger of two companies that do not compete and that are at different levels of the product or service-provision process. Such mergers do not reduce the number of competitors in a given market and, by producing efficiencies, generally have been considered productive and far less economically threatening than horizontal mergers among competitors. Indeed the Department of Justice (DoJ) had not challenged such a merger since the early 1970s. In challenging AT&T, DoJ argued that economic harm was threatened by the purported ability of the acquiring company to control downstream access to product and thus cause raised prices to consumers.  Judge Leon rejected DoJ’s arguments in all regards.

The communications industry has been patiently awaiting the outcome of the case. But that isn’t the only economic sector that is going to see energetic activity. The health care sector stands right beside it, and we expect to see vertical merger action there too.

There are many major deals in the wings and, especially in the health care space, a number of them involve potential vertical relationships. As health care costs continue to rise and both public and private payers move towards value-based and other models, vertical integration is expected to become more attractive.

We at Epstein Becker Green will be writing in greater detail in the days to come, but our antitrust team already is gearing up for counseling and litigation defense matters generated in the wake of the AT&T case. We’ll continue to report on any subsequent activity in that matter as well, with the deal set to close on June 21, unless a higher court intervenes. That team, consisting of Stuart Gerson, John Steren, Trish Wagner, and Mark Lutes, among others, scored a recent victory in an important merger case on behalf of its client Palmetto Health* in the Fourth Circuit case of SCPH Legacy Corp. v. Palmetto Health, in which the U.S. Court of Appeals rejected claims of antitrust standing and antitrust injury, two fundamental issues in merger analysis.

*Prior results are based on the merits of the case and do not guarantee a similar outcome.

The pace of health care transactions is robust, purchase price multiples are increasing, and many health care businesses are taking advantage of a sellers’ market.  Recently, our clients have increasingly turned to representation and warranty (“R&W”) insurance, finding a market more amenable to the nuances of health care deals than in the past. In the right deal, R&W insurance can limit risk to both seller and buyer and increase value to a seller by allowing for “walk-away” or “naked” deals.  R&W insurance may also be used as a tool by a buyer to increase the attractiveness of its offer in a competitive environment.

The acquisition of a company or its assets is typically governed by a purchase agreement and related transaction documents. The purchase agreement will contain various representations and warranties by the seller regarding a variety of matters, such as the seller’s assets and financial performance (including growth projections), and the accuracy of its billings for services, and its compliance with law (including healthcare laws and regulations). The buyer must do its own diligence before consummating a transaction, but in connection with such diligence it also relies on the seller’s representations and warranties. Following the closing of the transaction, if it is determined that one of the seller’s representations was incorrect (i.e., breached) and the buyer suffers damages as a result, the buyer usually has a right to compensation pursuant to the purchase agreement and related transaction documents.  Frequently, however, those agreements limit the amount that the buyer may recover, either in total, or by using various formulas, deductibles, and/or caps.   Even in the absence of these limits, if the cash purchase price has been distributed by a seller to its creditors and owners, a buyer seeking recovery may face a complex and difficult process.

The most common way to protect a buyer from potential losses that may be difficult to recover using simple indemnification is to escrow a portion of the purchase price from which claims may be paid. The amount of the escrow and how long it must be held are important negotiated terms in the purchase agreement. At the conclusion of the agreed-upon escrow period, the funds remaining in the escrow account will be released to the seller. Naturally, a buyer will want the most protection (and a large escrow amount), while a seller will want to retain the largest portion of the purchase price (and a small escrow amount). That’s where R&W insurance comes in.

R&W insurance shifts the risk of liability for breaches of representations and warranties from the seller to the insurance company in order to provide the parties to the transaction with greater protection post-closing. By utilizing R&W insurance, a buyer will be more comfortable placing a smaller portion (or even none) of the purchase price in escrow, resulting in a larger portion of the purchase price being paid to the seller at closing. In the event a breach of covered representations and warranties by the seller is discovered post-closing, the buyer may look to the insurance company rather than to the escrow (and therefore to the seller) to be made whole.

R&W insurance is an interesting way to shift the risk involved in a transaction and to provide a buyer with greater certainty of collection in the event of a breach. Further, making R&W insurance a component of a bid may provide a buyer a way to favorably distinguish itself from other bidders in a typical “sale process” run by investment bankers (or in auction-style sale). There are many other considerations, however, when deciding whether to use R&W insurance in lieu of the traditional escrow model. Such considerations include, among others:

  • The size of the policy needed for the transaction, and whether the resulting cost of the policy makes good business sense. The size of a policy can range significantly, in theory covering losses up to the full purchase price, which will impact the cost of the insurance.
  • Whether, and the extent to which, the buyer wants the seller to have “skin in the game” post-closing (i.e., in the form of an escrow), potentially making R&W insurance less desirable.
  • Which representations and warranties the policy excludes. If significant claims are excluded (e.g., Medicare claims, HIPAA violations, or specific matters already under government investigation or subject to litigation), there may be a weaker business case for buying R&W insurance.
  • Who will pay for the R&W insurance (buyer? seller? split?).
  • Some healthcare deals are harder to insure for representations and warranties relating to billing and coding compliance, such as providers with a higher percentage of government payor reimbursement and a greater number of “high-end” CPT codes.
  • The policy’s requirements for a buyer to make (and collect) a claim under the policy. For example, does the policy contain a materiality requirement?  Are the policy requirements consistent with the term of the purchase agreement?

Buyers and sellers should be aware of the existence of R&W insurance, as well as the above considerations, when analyzing and negotiating transactions. It may provide a valuable alternative to the traditional indemnification escrow model.

The National Institute of Standards and Technology (“NIST) has announced that it will be seeking industry input on developing “use cases” for its framework of cybersecurity standards related to patient imaging devices. NIST, a component of the Department of Commerce, is the agency assigned to the development and promulgation of policies, guidelines and regulations dealing with cybersecurity standards and best practices.  NIST claims that its cybersecurity program promotes innovation and competitiveness by advancing measurement science, standards, and related technology in ways that enhance economic security and quality of life. Its standards and best practices address interoperability, usability and privacy continues to be critical for the nation. NIST’s latest announcement is directed at eventually providing security guidance for the healthcare sector’s most common uses of data, inasmuch as that industry has increasingly come under attack.

The current announcement is reflective of the interest of NIST and the Food & Drug Administration (“FDA”), the primary regulatory agency for medical devices, within the so-called Internet of Things (“IoT”).  Thus, NIST, through its National Cybersecurity Center of Excellence, will accept proposals up to  June 8, 2018, for “products and technical expertise” relevant to the creation of guidelines for securing data used by Picture Archiving and Communication Systems (“PACS”). NIST will attempt to harmonize the requirements for patient imaging devices with NIST’s overall cybersecurity framework.

The proposed project will examine the specific uses and regulatory requirements for patient imaging devices, and how those varying considerations apply to the use of the NIST cybersecurity framework. As the NIST project summary notes PACS are regulated by the FDA as “class II” devices that provide one or more functions related to the “acceptance, transfer, display, storage, and digital processing of medical images.”  These devices, which can be found in virtually every hospital, are not only vulnerable to cyber-attack in and of themselves, but NIST sees them as a “pivot point into an integrated healthcare information system.”

The current imaging device project follows last year’s release of draft guidelines for wireless infusion pumps, and evidences the government’s continuing concern, not only with the security of the IoT, but with specific reference to the vulnerable health care sector.

Epstein Becker Green routinely deals with questions related to medical device regulation and cybersecurity. For further information, you can contact Stuart Gerson, Adam Solander, Bradley Merrill Thompson or James Boiani.

The Florida State Legislature has decided to eliminate its state licensure requirement for clinical laboratories.  Effective July 1, 2018, Florida’s recent legislation (SB 622) repeals the entirety of Chapter 483, Part I of the Florida statutes, and in doing so removes the state licensure requirement for clinical laboratories operating in-state and out-of-state.  Section 97 of SB 622, approved by the Governor on March 19, 2018, repeals the entirety of Chapter 483, Part I of the Florida statutes, and therefore, in tow, eliminates section 59A-7.024(1) and as well as all other corresponding regulations.

Currently, all clinical laboratories providing services within the state of Florida must maintain a state license unless you were either: (1) a clinical laboratory operated by the U.S. government; (2) a clinical laboratory that only performed waived tests; or (3) a clinical laboratory that was operated and maintained exclusively for research and teaching purposes that did not provide services to patients.  Furthermore, an out-of-state laboratory testing specimens derived from the state of Florida is also required to obtain Florida state licensure if: (1) the out-of-state laboratory maintains an office, specimen collection station or other facility within the state of Florida (Fla. Adm. Code 59A-7.024); or (2) receives a specimen for examination from a clinical laboratory located within the state of Florida (Fla. Stat. § 483.091).

Beginning July 1, 2018, clinical laboratories and stakeholders will be able to provide their laboratory services in Florida or to Florida healthcare providers as long as they meet federal CLIA certification requirements.  Florida’s Agency for Health Care Administration (AHCA) expects to roll-out notifications regarding the change in state licensure requirements to currently licensed clinical laboratories in approximately two weeks and will post notice on its website.

In yet another development on the fight to address the opioid epidemic, U.S. Attorney General Jeff Sessions announced on Tuesday, April 17th that the U.S. Drug Enforcement Administration (“DEA”) will issue a Notice of Proposed Rulemaking (“NPRM”) amending the controlled substance quota requirements in 21 C.F.R. Part 1303. The Proposed Rule was published in the Federal Register yesterday and seeks to limit manufacturers’ annual production of opioids in certain circumstances to “strengthen controls over diversion of controlled substances” and to “make other improvements in the quota management regulatory system for the production, manufacturing, and procurement of controlled substances.”[1]

Under the proposed rule, the DEA will consider the extent to which a drug is diverted for abuse when setting annual controlled substance production limits. If the DEA determines that a particular controlled substance or a particular company’s drugs are continuously diverted for misuse, the DEA would have the authority to reduce the allowable production amount for a given year. The objective is that the imposition of such limitations will “encourage vigilance on the part of opioid manufacturers” and incentivize them to take responsibility for how their drugs are used.

The proposed changes to 21 C.F.R. Part 1303 are fairly broad, but could lead to big changes in opioid manufacture if implemented. We have summarized the relevant changes below.

Section 1303.11: Aggregate Production Quotas

Section 1303.11 currently allows the DEA Administrator to use discretion in determining the quota of schedule I and II controlled substances for a given calendar year by weighing five factors, including total net disposal and net disposal trends, inventories and inventory trends, demand, and other factors that the DEA Administrator deems relevant. Now, the proposed rule seeks to add two additional factors to this list, including consideration of the extent to which a controlled substance is diverted, and consideration of U.S. Food and Drug Administration, Centers for Disease Control and Prevention, Centers for Medicare and Medicaid Services, and state data on legitimate and illegitimate controlled substance use. Notably, the proposed rule allows states to object to proposed, potentially excessive aggregate production quota and allows for a hearing when necessary to resolve an issue of material fact raised by a state’s objection.

Section 1303.12 and 1303.22: Procurement Quotas and Procedure for Applying for Individual Manufacturing Quotas

Sections 1303.12 and 13030.22 currently require controlled substance manufactures and individual manufacturing quota applicants to provide the DEA with its intended opioid purpose, the quantity desired, and the actual quantities used during the current and preceding two calendar years. The DEA Administrator uses this information to issue procurement quotas through 21 C.F.R. § 1303.12 and individual manufacturing quotas through 21 C.F.R. § 1303.22. The proposed rule’s amendments would explicitly state that the DEA Administrator may require additional information from both manufacturers and individual manufacturing quota applicants to help detect or prevent diversion. Such information may include customer identities and the amounts of the controlled substances sold to each customer. As noted, the DEA Administrator already can and does request additional information of this nature from current quota applicants. The proposed rule would only provide the DEA Administrator with express regulatory authority to require such information if needed.

Section 1303.13: Adjustments of Aggregate Production Quotas

Section 1303.13 allows the DEA administrator to increase or reduce the aggregate production quotas for basic classes of controlled substances at any time. The proposed rule would allow the DEA Administrator to weigh a controlled substance’s diversion potential, require transmission of adjustment notices and final adjustment orders to a state’s attorney general, and provide a hearing if necessary to resolve material factual issues raise by a state’s objection to a proposed, potentially excessive adjusted quota.

Section 1303.23: Procedures for Fixing Individual Manufacturing Quotas

The proposed rule seeks to amend Section 1303.23 to deem the extent and risk of diversion of controlled substances as relevant factors in the DEA Administrator’s decision to fix individual manufacturing quotas. According to the proposed rule, the DEA has always considered “all available information” in fixing and adjusting the aggregate production quota, or fixing an individual manufacturing quota for a controlled substance. As such, while the proposed rule’s amendment may require manufacturers to provide the DEA with additional information for consideration, it is not expected to have any adverse economic impact or consequences.

Section 1303.32: Purpose of Hearing 

Section 1303.32 currently grants the DEA Administrator to hold a hearing for the purpose of receiving factual evidence regarding issues related to a manufacturer’s aggregate production quota. The proposed rule would amend this section to conform to the amendments to sections 1303.11 and 1303.13 discussed herein, allowing the DEA Administrator to explicitly hold a hearing if he/she deems a hearing to be necessary under sections 1303.11(c) or 1303.13(c) based on a state’s objection to a proposed aggregate production quota.

Industry stakeholders will have an opportunity to submit comments for consideration by the DEA by May 4, 2018.

[1] DEA, NPRM 21 C.F.R. Part 1303 (Apr. 17, 2018).