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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.

HCCAci

The Health Care Compliance Association (HCCA) kicked off its 22nd Annual Compliance Institute on Monday, April 16, 2018. During the opening remarks, Inspector General Daniel Levinson, of the Department of Health and Human Services (HHS) Office of Inspector General Office (OIG), announced the rollout of a new public resource to assist companies in ensuring compliance with Federal health care laws. The Compliance Resource Portal on the OIG’s website features:

  • Toolkits
  • Advisory opinions
  • Provider Compliance Resource and Training
  • Voluntary Compliance and Exclusions Resources
  • Resources for Health Care Boards and Physicians
  • Accountable Care Organizations
  • Special Fraud Alerts, Other Guidance, and Safe Harbors

The main benefit of the portal is that it streamlines public access to helpful compliance guidance resources, and allows for OIG to highlight new materials and updates.  For example, the portal already indicates that a Toolkit to Identify Patients at Risk of Opioid Misuse is “coming soon.”

In addition to announcing the portal, the Inspector General also touched on the dynamic shift in compliance considerations due to changes in the health care industry. Shifts such as the move towards value based care and the increase in role of technology create new risks and issues for providers, which makes user-friendly public access to compliance resources increasingly more important.

The Inspector General also emphasized the OIG’s focus on the “power of data” when it comes to compliance.  Mr. Levinson’s remarks indicated that data-driven decision making is crucial to navigating risk-mitigation waters, and that consequently the OIG places high value on the diligent collection and review of data in the compliance context.

Faced with the inability to repeal the Affordable Care Act (“ACA”) outright, the Trump Administration and Congress have taken actions to provide more health insurance options for Americans.  Thus far, the Administration announced that they would no longer make cost sharing reduction (“CSR”) payments to insurers on the Exchanges and extended the time period in which short-term, limited-duration insurance (“STLDI”) plans could be offered.  Meanwhile, Congress removed the individual mandate in the 2017 tax bill. The Administration asserts that these efforts are all solutions geared toward helping more Americans receive care as premiums are rising.  A March 28, 2018 Gallup poll showing that health care costs are a higher concern for Americans, over the economy supports the Administration’s asserted justification. However, some states have recently taken their own steps to provide more health coverage options for their citizens while discounting the ACA, possibly reflecting a sense of dissatisfaction with the seemingly dragging feet of the Federal Government.

Idaho

The Governor of Idaho released an Executive Order on January 5, directing the Idaho Department of Insurance to approve options that follow all state-based requirements, even if not all ACA requirements are met, so long as the carrier offering the option also offered an exchange-certified alternative in Idaho and authorized the Director of the Department of Insurance to seek a waiver from the U.S. Department of Health and Human Services in conjunction with this Executive Order, if the Director believed it is appropriate or necessary.

Idaho officials then released Bulletin No. 18-01 on January 24, which provides new provisions for “state-based plans” for those individuals who do not qualify for premium subsidies under the ACA. Under Idaho’s proposal, insurers would be allowed to (1) sell plans with 50% higher premiums for people with pre-existing conditions; (2) exclude coverage for pre-existing conditions for people who had a gap in coverage; (3) vary premiums by 5-to-1 based on age; (4) exclude coverage for some ACA essential benefits such as maternity care; and (5) set a $1 million annual cap on benefits. All of these provisions are prohibited by the ACA.

In February, Idaho sought approval for the Bulletin by Center for Medicare and Medicaid Services (“CMS”); however, CMS denied the proposition. CMS Administrator Seema Verma wrote a letter stating that Idaho’s proposed requirements are not in compliance with the ACA and warned that, if Idaho did not enforce the ACA standards, CMS would be forced to step in and directly enforce the ACA protections in the Idaho market.  If any health insurance issuer that is subject to CMS’s enforcement authority fails to comply with the ACA requirements, it may be subject to civil monetary penalties for each violation of up to $100 each day, for each responsible entity, for each individual affected by the violation.  Despite the response from CMS, Idaho still seeks to expand coverage options for Idaho residents.

Iowa

In a similar fashion, Governor Kim Reynolds urged the Iowa legislature to make health insurance affordable for Iowa residents in the Condition of the State Address.  On April 2, the Governor signed into law a bill that allows small businesses or self-employed individuals to band together to buy coverage through association health plans that do not comply with ACA plans.  The legislation would allow insurers to deny coverage to those with pre-existing conditions, create lifetime caps, and does not offer maternity care.   However, proponents of the bill emphasize that the coverage would not be considered insurance, but rather would simply function as a “health benefits plan”.  Proponents also note that these plans are cheaper alternatives for small employers or the self-employed.

Key Takeaways

States creating affordable health coverage with blatant disregard for the ACA is a note-worthy development in today’s tense healthcare climate. The outcome of the push of these initiatives by states is crucial because they are challenging the Administration’s willingness to enforce the ACA. Tolerance of such state plans would lead to cherry-picking, which would inevitably cause further destabilization of the market. Notably, CMS and Secretary of Health and Human Services Alex Azar have each emphasized upholding ACA as the law of the land. Stakeholders should pay attention to the outcome of these proposals because not only would the implementation of these plans destabilize markets, but the plans could also incentivize more states to follow suit and create their own plans.

On February 20th the Department of the Treasury, Department of Labor, and Department of Health and Human Services (together the “tri-agencies”) released a proposed rule which would alter how long short-term, limited-duration insurance (“STLDI”) plans could be offered. Under current rules the maximum duration that a STLDI plan can be offered is less than 3 months, if the proposed rule is enacted that period would be extended to less than 12 months.  The tri-agencies are accepting comments on the proposed rule until April 23rd.

What are short-term, limited-duration health insurance plans?

STLDI plans were designed to provide temporary coverage for consumers who otherwise could not access longer-term health insurance products (such as a consumer transitioning between jobs). Coverage offered by STLDI plans is not considered Minimum Essential Coverage and because STLDI plans do not meet the definition of “individual health insurance coverage” established by the Public Health Service Act they are exempted from many of the Affordable Care Act (“ACA”) requirements. Due to the fact that STLDI plans don’t have to comply with ACA requirements they commonly feature preexisting condition exclusions, annual and life time limits, feature higher cost-sharing requirements, and are medically underwritten they tend to be less expensive and attract younger, healthier enrollees.

Why are the regulations changing?

The proposed rule was issued in response to President Trump’s October 12, 2017 executive order which, among other things, instructed the tri-agencies to reconsider the Obama era rule which limited the time period STLDI plan could be offered to less than 3 months. The presumed intent of proposed rule is to foster more and less expensive health insurance options for individuals in the individual market.  However, the Obama administration initially issued the regulations limiting STLDI plans after observing that the plans were adversely impacting the marketplace risk pools, and the political motivation to adversely impact those risk pools and through them “Obamacare” can’t be fully discounted.

What is the likely impact?

The consensus among policy makers is that extending the duration of the coverage period that STLDI can be offered is likely to increase the number of consumers who elect to enroll in these plans over health insurance that constitutes Minimum Essential Coverage. The number of people enrolling in STLDI plans is likely to increase further in 2019 when consumers will no longer face a tax penalty for failing to maintain minimum essential coverage. One estimate suggests that if the proposed rule is enacted in 2019, 4.2 million consumers will enroll in the STLDI plans and 2.9 million fewer people will maintain Minimum Essential Coverage. While we don’t know the scope this would have on the risk pools in the individual market, it warrants monitoring by plans and providers moving forward.

On February 9, 2018, President Trump signed into law the Bipartisan Budget Act of 2018 (“BBA”). Among the most notable changes that will occur with the enactment of the BBA is the inclusion of certain provisions taken from the Creating High-Quality Results and Outcomes Necessary to Improve Chronic (“CHRONIC”) Care Act of 2017 bill (S.870) which the Senate passed in September 2017. Among other things, the CHRONIC Care provisions will have the effect of redefining new criteria for special-needs plans (“SNPs”), in particular the special-needs Medicare Advantage (“MA”) plans for chronically ill enrollees. The CHRONIC Care provisions also will expand the integration and coverage under Medicare for certain telehealth-based chronic care services.

Impact on MA Special Needs and Other MA Plans

The BBA includes provisions taken from the CHRONIC Care Act that largely affect MA SNPs, though other types of MA plans may also be affected by the enacted changes.

The critical issue Congress finally settled through the enactment of the BBA is the long-term status of the MA SNP Program (the “Program”).  Congress created the Program through the Medicare Modernization Act of 2003 (enacted Dec. 8, 2004).  However, the Program was time limited, with a scheduled end date of December 2008.  The Program has since been extended a total of 7 times, with Congress generally pushing out the Program’s end date by a year or two but never giving stakeholders a clear signal of support for the Program, leaving many stakeholders hesitant in making large investments in a program that was scheduled to terminate.[1]

The amendments made by the BBA have provided not only a more secure future to encourage plan sponsors and other stakeholders to further invest in the Program, but have also made changes to strengthen these programs. With respect to those SNPs targeting the dual eligible population (“Dual SNPs”), statutory changes provide for:  increasing integration through use of mechanisms to better coordinate contact with and information dissemination to State partners; requiring the Secretary to develop a unified grievances and appeals process for Dual SNPs to implement by 2021; and imposing more stringent standards to demonstrate integration. With respect to those SNPs focused on serving the chronically ill (“Chronic SNPs”), the BBA broadens the definition of beneficiaries who qualify to enroll in a Chronic SNP, imposes more stringent care management standards, and authorizes Chronic SNPs to provide certain Supplemental Benefits. The BBA further amends the Social Security Act to authorize the Secretary to require quality reporting at the plan level for SNPs, and, subsequently, for all MA plan offerings.

Impact on Accountable Care Organizations

The BBA makes several statutory changes impacting Accountable Care Organizations (“ACOs”) and beneficiary participation in such entities. Specifically, under the terms of the Act, fee-for-service (“FFS”) beneficiaries will be able to prospectively and voluntarily select an ACO-participating professional as their primary care provider and for purposes of being assigned to that ACO. The BBA further authorizes ACOs to provide incentive payments to encourage fee-for-service beneficiaries to obtain medically necessary primary care services.

Expansion of Medicare FFS Telehealth Coverage for Chronic Care Services

Additionally, the BBA includes certain provisions taken from the CHRONIC Care Act that will provide a needed expansion of Medicare FFS coverage for certain telehealth-based chronic care services. The BBA preserves many of the telehealth-focused aspects of the original 2017 bill equivalent and, seemingly, reflects a commitment by the federal government to improving access to telehealth services for qualified Medicare beneficiaries and further integrating these services into the U.S. health care system. For example, with the enactment of the BBA, Medicare coverage of telehealth services will be expanded to include services provided at home for beneficiaries dealing with end-stage renal disease (“ESRD”) or those being treated by practitioners participating in Accountable Care Organizations (“ACOs”). Additionally, with the enactment of the BBA, some of the geographic requirements traditionally required by Medicare’s coverage rules for telehealth services (e.g., originating sites, rural health professional shortage areas, counties outside Metropolitan Statistical Areas) will be lifted if such telehealth services are rendered to beneficiaries with ESRD, or who are being treated by ACO practitioners, or who are being diagnosed, evaluated, or treated for symptoms of an acute stroke. There are some important caveats to these changes in the coverage rules. For example, for ESRD beneficiaries who utilize telehealth services from their homes, an in-person clinical assessment will be required for such beneficiaries every month for the first 3 months and then once every 3 months thereafter. Likewise, payments will not be made for any telehealth services rendered by ACO practitioners to beneficiaries in their homes if such services typically are furnished in inpatient settings (e.g., hospitals).

As part of increasing benefits offered to special needs MA plan enrollees (as discussed above), the enactment of the BBA also will allow MA plans to offer more telehealth services to its enrollees, including services provided through supplemental health care benefits, starting in the year 2020. However, this provision requires that the same types of items and services an MA plans offers to its enrollees via telehealth are also offered to enrollees in-person. CMS is required to solicit public comments regarding this particular provision by November 30, 2018.

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With the BBA establishing a long-term MA SNP Program, we are more likely to see increased investment into the Program by stakeholders and plan sponsors, thus growing and strengthening the Program. But, as explained above, the BBA also introduces several amendments that will certainly affect Dual and Chronic SNP standards, benefits, and coordination of care.  Although CMS has not formally solicited public comments regarding implementation of the referenced changes to SNP requirements, stakeholders and plan sponsors may want to consider the impact these changes may have on them and their industry and submit comments and input to help CMS in developing its proposed regulations.

For telehealth advocates, the inclusion of so many meaningful provisions in the BBA signals a newly energized willingness on the part of policymakers to work to expand use of telehealth services for Medicare beneficiaries, even in an environment where there are financial incentives for providers and health plans to restrain costs. Although lawmakers have historically resisted expanding these types of services in a FFS context, the belief being that doing so would add to (and not replace) services already otherwise being delivered, the enactment of the BBA signals strong potential for change in this regard.  As telehealth integration into various Federal programs increases, the enactment of the BBA being a critical step in this process, stakeholders and plan sponsors may want to consider the various implementation strategies by which telehealth items and services will be offered since each program carries its own set of standards and requirements.

[1] Pub. L. 110–173, §[  ], substituted ‘‘2010’’ for ‘‘2009’’; Pub. L. 110–275, §164(a), substituted ‘‘2011’’ for ‘‘2010”; Pub. L. 111–148, § 3205(a), substituted “2014” for “2011”;  P.L. 112-240, §607, struck out “2014” and inserted “2015”; P.L. 113-67, §1107, struck out “2015” and inserted “2016”; P.L. 113-93, §107, struck out “2016” and inserted “2017”; P.L. 114-10, §206 struck “2017”, inserted “2019″.

 

The Centers for Medicare and Medicaid Services’ (“CMS”) recently announced its intent to expand what may be considered “supplemental benefits,” broadening the scope of items and services that could be offered to Medicare Advantage (“MA”) plan enrollees over and above the benefits covered under original Medicare. However, in articulating the standards for covering this broadened group of items and services, CMS proposed a new requirement that could greatly limit enrollees’ ability to access all types of supplemental benefits and increase the already substantial burden on MA participating providers; CMS now proposes to require that the supplemental benefits be ordered by a licensed provider.

Under current CMS guidance, supplemental benefits may not be a Part A or Part B covered service, must be primarily health related in that “the primary purpose of the item or service is to prevent, cure or diminish an illness or injury,” and the plan sponsor must incur a non-zero cost for the benefit. Medicare Managed Care Manual, Ch. 4, Sec. 30.1. Within the draft 2019 Call Letter, released on February 1, 2018, CMS proposes to expand the scope of items and services considered “primarily health related” to now include items and services to help maintain health status and not only those that “prevent, cure or diminish illness or injury.” According to CMS, under its new interpretation, in order for a service or item to be primarily health related “it must diagnose, prevent, or treat an illness or injury, compensate for physical impairments, act to ameliorate the functional psychological impact of injuries or health conditions, or reduce avoidable emergency and healthcare utilization.” Current CMS guidance explicitly excludes from being a supplemental benefit those items or services which are solely for daily maintenance purposes.  CMS’s broadened definition follows medical and health care research studies which have shown the value of certain ‘maintenance’ items and services in diminishing the effects of injuries or health conditions and decreasing avoidable emergency and health care services.

While broadening the scope of items and services eligible to be considered supplemental benefits, CMS concurrently proposes to add a more stringent standard to an enrollee’s receipt of such benefits. “Supplemental benefits under this broader interpretation must be medically appropriate and ordered by a licensed provider as part of a care plan if not directly provided by one.” Although current guidance specifies medical necessity as a standard for supplemental benefits that extend the coverage of original Medicare, there is no requirement that supplemental benefits be ordered by a licensed provider. Depending upon the nature of the supplemental benefit, such a rule could prevent an enrollee from accessing certain benefits. For example, plan sponsors may provide acupuncture or other alternative therapies as supplemental benefits, but enrollees would only be able to access such services if their provider accepts the value of such services and agrees that they are medically necessary. Given that many in traditional medicine do not support the use of alternative therapies, it is likely that at least some enrollees will be unable to access these benefits under this newly proposed standard.  Also, requiring a provider to review and order other types of supplemental benefits would likely create a paperwork burden with no benefit, including, for example, with respect to a supplemental transportation benefit, fitness benefit or over-the-counter drug benefit.

Although CMS should be applauded for seeking to expand the definition of “health related” in identifying eligible supplemental benefits, its proposal to require that such benefits be ordered by a provider as part of a treatment plan will decrease plan flexibility and increase burden for providers and enrollees alike, with minimal benefit.

CMS is accepting comments on the draft Call Letter through 6pm EST, Monday March 5, 2018.

In the last couple of months, ballot initiatives have significantly affected health policy and the health industry as a whole. Constituents are becoming more involved in policy matters that have traditionally been left to elected officials in state legislatures. On January 25, 2018, Oregon held a special election for a ballot initiative that asked whether Oregonians would support funding the state Medicaid program by taxing health plans and hospitals. The ballot initiative passed with a margin of 62 percent of voters supporting the measure. The measure proposed a 1.5 percent tax on insurance premiums and a .7 percent tax on large hospitals to help fund Medicaid expansion. Proponents argued that 350,000 people who receive health coverage through Medicaid expansion would lose coverage if the measure was not supported.

Oregon is not the only state that has used a ballot initiative to substantially affect health policy. On November 7, 2017, Maine was the first state to use a ballot initiative to expand Medicaid coverage. The ballot measure overwhelming passed without the support of the Governor. The Governor is now withholding the implementation of the measure due to fundamental issues on how to fund Medicaid expansion.

Traditionally, ballot initiatives are frequently used to amend state constitutions or topics regarding public health. Health policy issues such as Medicaid and funding for health care seldom had direct input from constituents. However, as many states are faced with one party legislature, ballot initiatives have become a way to circumvent the traditional means of legislating. Constituents are actively using ballot initiative to help shape policy issues that directly affect the health industry. About 24 states have ballot initiative processes that allow constituents to bypass state legislatures by placing proposed statutes on the ballot. Although states have different processes, a ballot initiative requires a specific number of signatures for an initiative to be placed on a ballot. In states with an indirect initiative process, such as Maine, ballots with enough signatures are submitted to the legislature where elected officials have an opportunity to act on the proposal. If the legislature rejects the measure, submits a different proposal or takes no action, the measure goes to the ballot for a vote. In states with direct initiatives, such as Oregon, proposals go directly on the ballot for a vote.

With the success of Oregon and Maine, other states may utilize the ballot initiative process to substantially change health policy in their state. For example, after years of failing to expand Medicaid in Utah, advocates have already begun to gather signatures needed by April 15, 2018 to put Medicaid expansion on the 2018 ballot. Additionally, advocates in Idaho have filed paperwork for a ballot initiative to expand Medicaid.

As more states consider ballot initiatives as a legislative tool for health policy, stakeholders should not only look to legislative assemblies for changes in health policy but ballot initiatives that can affect the industry. Grassroots advocacy has always played a major role in shaping state policy and now substantial health policy can be added to the list.

On December 14, the Federal Communications Commission (FCC) voted to remove regulations that prohibit providers from blocking websites or charging for high quality service to access specific content. Many worry that allowing telecommunications companies to favor certain businesses will cause problems within the health care industry. Specifically, concerns have risen about the effect of the ruling on the progress of telemedicine and the role it plays in access to care. Experts worry that a tiered system in which service providers can charge more for speed connectivity can be detrimental to vulnerable populations.  Although the ramifications of the ruling are not entirely known, an exception for health care services would ensure that vulnerable populations can continue to gain access to care.

Telemedicine is often used as a tool to improve care by providing access to those who wouldn’t ordinarily have access to care. Through video consultation, patients have the ability to check-in with health care providers and access health specialists. Robust connectivity is vital for these services and community providers, and rural areas may lack the financial means to pay for optimal connectivity in a tiered framework.

In the past, the FCC recognized the importance of broadband connectivity to the health care industry. In 2015, the FCC‘s Open Internet Order acknowledged that health care is a specialized service that would be exempt from conduct based rules.  However, the new rule may undermine the 2015 Order and thus leave vulnerable populations at risk.

Moreover, the technology industry would likewise benefit from a health services exception. Innovation in health care delivery could be stifled by the FCC ruling and hurt the population as a whole. From tech start-ups to access-to-care advocates, various members of the health care ecosystem may need to anticipate building coalitions and urge the FCC to create an exception for health care services.

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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).

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.