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.

Over the past week, the White House administration (the “Administration”) has issued two documents addressing drug pricing. First, on February 9, 2018, the White House’s Council of Economic Advisers released a white paper titled “Reforming Biopharmaceutical Pricing at Home and Abroad” (the “White Paper”).  Second, on February 12, 2018, the Administration issued its 2019 Budget Proposal (“2019 Budget”).

Whereas the recommendations set forth in the White Paper are more conceptual or exploratory, the 2019 Budget purportedly reflects the Administration’s more specific priorities for 2019. The developments are significant because, after outspoken pledges to reduce drug prices over a year ago, the White Paper and the 2019 Budget, taken together, are the Administration’s first attempt to set forth its drug pricing policy framework.

FY 2019 Budget Proposal Outline

The Administration’s 2019 Budget proposes strategies to address drug pricing reform in several areas.

  • Medicaid: The 2019 Budget proposes for new Medicaid demonstration authority to allow five states to test drug coverage and financing reform. Under this demonstration, instead of participating in the Medicaid Drug Rebate Program, these states would determine their own drug formularies and negotiate drug prices directly with manufacturers, with the resulting negotiated prices being exempt from Best Price.
  • Medicare Part B: With respect to the Medicare program, the 2019 Budget provides several proposals. First, the 2019 Budget would require all manufacturers of Part B drugs to report average sales price (“ASP”) data, and to penalize those who do not report ASP data. Additionally, the 2019 Budget proposes to limit the increase in ASP-based drug payment to the annual rate of inflation. For drugs reimbursed based on wholesale acquisition cost (“WAC”) rather than ASP, the 2019 Budget proposes to reduce this payment rate from 106% of WAC down to 103% of WAC. The 2019 Budget also proposes to modify reimbursement to hospitals for drugs acquired at 340B discounts by rewarding hospitals that provide charity care, and reducing payments to hospitals that provide little to no charity care. The 2019 Budget proposes to consolidate certain drugs covered under Part B into Part D coverage.
  • Medicare Part D: For beneficiaries enrolled in Part D plans, the 2019 Budget proposes to establish an out-of-pocket maximum in the catastrophic coverage phase, eliminate cost-sharing for generic drugs for low-income seniors, and permanently authorize a Part D demonstration that provides retroactive and point-of-sale coverage to certain low-income patients.
  • FDA: The 2019 Budget proposes to give the FDA greater ability to bring generics to market more quickly. If a first-to-file generic application is not yet approved due to deficiencies, the 2019 Budget proposes to allow the FDA to tentatively approve a subsequent generic application rather than waiting for the first-to-file application to amend its application deficiencies.

Council of Economic Advisers White Paper

The White Paper discusses options for drug pricing reforms that would impact Medicaid, Medicare, the 340B drug discount program, and FDA. The following provides a summary of the major ideas proposed in the White Paper:

  • Medicaid: The White Paper contends that the determination of Best Price on a single unit of drug under the Medicaid Drug Rebate Program operates as an inducement to manufacturers to inflate commercial prices. The White Paper posits that CMS could revise the applicable rules for Best Price without conflicting with the statutory language, such that Best Price could be determined post-sale based on “the patient’s recovery”, i.e., the health outcome or effectiveness of the drug. The White Paper suggests that more clarity from CMS on value-based contracting would encourage drug purchasers to negotiate for lower prices.
  • Medicare Part B: With respect to drugs reimbursable under Medicare Part B, the White Paper focuses on expensive specialty drugs and biologics administered by physicians. The White Paper contends that due to the cost-plus reimbursement methodology under Medicare Part B (ASP plus 6 per cent), physicians do not have incentives to prescribe cheaper medications to control costs. The White Paper cites solutions proposed by MedPAC and other government agencies to realign incentives including: (i) introducing physician reimbursement that is not tied to drug prices, (ii) moving Medicare Part B drug coverage into Medicare Part D, where price-competition over drug prices is better structured, and (iii) changing how pricing data is reported to increase transparency.
  • Medicare Part D: The White Paper scrutinizes the Part D program as being structured in a manner that prevents pricing competition and causes “perverse incentives.” Specifically, the White Paper suggests that Part D’s requirement to cover at least two non-therapeutically equivalent products within each class and category prevents Part D sponsors from competitively negotiating lower prices and that the prohibition of formulary tier-based cost-sharing for low income beneficiaries creates a disincentive to use “high value” rather than high cost drugs. In addition, the White Paper states that since the 50% discount drug manufacturers are required to provide during the coverage gap is applied to the patient’s true out-of-pocket costs, enrollees have an incentive to use high cost drugs while in the coverage gap.In addition to making the specific observations above, the White Paper cites more general options proposed by MedPAC, OIG and other government agencies to address “misaligned incentives”: (i) requiring plans to share drug manufacturer discounts with patients, (ii) allowing plans to manage formularies to negotiate better prices for patients, (iii) lowering co-pays for generic drugs for patients; and (iv) discouraging plan formulary design that speeds patients to the catastrophic coverage phase of benefit and increases overall spending.
  • 340B Drug Discount Program: The White Paper posits that there are two significant issues with the 340B Program. The first is “imprecise eligibility criteria has allowed for significant program growth beyond the intended purpose of the program.” The second is the use of program revenue for purposes other than providing care for low-income patients, which is what the Administration believes was originally intended. While not providing specifics, the White Paper suggests establishing “more precise” eligibility criteria as an alternative to the DSH percentage currently used to establish hospital eligibility, and requiring that the 340B discount more directly benefit poor patient populations.
  • FDA: The White Paper suggests modifying the existing FDA criteria for expedited review to include new molecular entities that are second or third in a class, or second or third for a given indication for which there are no generic competitors. The White Paper states that this would reduce the time period a particular drug would be able to benefit from a higher price before facing generic competition. The White Paper also suggests policies aimed at reducing the cost of innovation, including having the FDA continue to facilitate the validation and qualification of new drug development tools that allow manufacturers to demonstrate safety and efficacy more efficiently and earlier, and speeding up the issuance of FDA final guidelines to add certainty and attract additional biosimilar applicants to the marketplace.
  • Pharmacy Benefit Managers: The White Paper scrutinizes the PBM industry as having “outsized profits” due to the high concentration of the PBM market (3 PBMs account for 85% of the market) and criticizes the lack of transparency with respect to the rebates that PBMs receive. The White Paper states that the “undue market power” causes manufacturers to set artificially high list prices, which are reduced via rebates to PBMs without reducing the costs to consumers. The White Paper suggests that policies to decrease concentration in the PBM market could reduce the price of drugs paid by consumers.
  • Drug Pricing in Foreign Countries: The White Paper discusses in detail how the United States bears a disproportionate share of the burden of the cost of innovation, since foreign governments, in exercising price control, are able to set drug prices lower than that in the United States. The White Paper suggests drug pricing reform abroad with the United States changing the incentives of foreign governments to price drugs at levels that reward innovation. The White Paper broadly suggests achieving this goal through enhanced trade policy or policies tying reimbursement levels in the United States to prices paid by foreign governments that set lower prices or other methods.

EBG Considerations

The combined result of the 2019 Budget and the White Paper is a hodgepodge of policy ideas that could impact a wide range of government programs and industry stakeholders throughout the drug distribution and reimbursement channel. While the proposals set forth in the 2019 Budget are more specific, the ideas in the White Paper are more conceptual and less developed.  For example, policies to address the high concentration of the PBM market and foreign government drug price control appear more aspirational and lack detail on what such policies would entail or how they would be accomplished.  This suggests that, while the 2019 Budget and White Paper are indicative of the Administration’s direction with respect to drug pricing policy, the policy is likely still a “work in progress” and subject to further development.

We will continue to report on how these ideas take shape in this Administration.

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.

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.

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.

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.

Our colleague Robert F. Atlas, President of EBG Advisors, Inc., published an advisory that will be of interest to stakeholders in the health care industry: The After-Effects of Graham-Cassidy’s Demise.

Following is an excerpt:

Taken together, the failure of the ACA repeal-and-replace effort (for now) bodes well for health care providers. The percentage of the population that’s covered—and thus is less likely to represent uncompensated care for providers—will remain fairly high, notwithstanding some erosion if the individual market isn’t bolstered.

Similarly, insurers will continue to have most of the enrollees whom they gained thanks to the ACA. True, at least with regard to exchange enrollees, the insurers may see a slightly worse adverse selection that would challenge profitability, but they can raise premiums without causing too many defections among the majority of enrollees who are eligible for federal premium subsidies. And the continuation of high levels of Medicaid enrollment benefits many insurers as well. Nearly all states contract with private health plans to coordinate care for Medicaid beneficiaries in return for capitation payments; in the aggregate, approximately one-half of all Medicaid dollars run through private plans.

For most employers, the direct effects of Graham-Cassidy and other GOP repeal-and-replace measures were never very strong. Had Graham-Cassidy passed, the mandate for employers with 50 or more workers to offer health insurance would have disappeared, but with the labor market tightening, few large employers are inclined to stop offering health benefits anyway.

Manufacturers of pharmaceuticals stand to benefit—or not to be harmed—thanks to the continuation of the ACA and Medicaid laws in their current forms. The more people who have health insurance generally, the more people who have coverage for prescription medications. Medical device makers, on the other hand, were counting on Graham-Cassidy to repeal the medical device tax that they believed hurt them. Though, they may have reason to hope that the tax will be repealed or at least delayed in other vehicles, as there are plenty of Democratic legislators who agree with Republicans that the tax ought to go.

Read the full advisory here.

Many health care providers rely on a worked relative value unit (“wRVU”) based compensation model when structuring financial relationships with physicians. While wRVUs are considered an objective and fair method to compensate physicians, payments made on a wRVU basis do not always offer a blanket protection from liability under the Federal Stark Law.  As recent settlements demonstrate, wRVU based compensation arrangements that are poorly structured or improperly implemented can result in significant liability.

The wRVU physician compensation model is particularly favored for its low level of risk under the Stark Law, which prohibits physicians from making certain financially motivated referrals. While the Stark Law prohibits physician compensation based on referrals, it does permit physicians to earn certain productivity bonuses for personally performed services.  wRVUs are an accepted method in calculating performance or productivity bonuses for services personally performed by the physician.[1]

How wRVU based compensation can become problematic is illustrated by a recent $34 million settlement between the Department of Justice (“DOJ”) and defendants Mercy Hospital Springfield (the “Hospital”) and Mercy Clinic Springfield (the “Clinic”), an oncology infusion center. After the infusion center was transferred from the Clinic to the Hospital in order to take advantage of inpatient hospital reimbursement and 340B drug pricing, the physicians allegedly wanted to be “made whole” for the compensation they previously earned at the Clinic. The resulting contractual arrangements with the physicians contemplated the provision of a productivity bonus tied to the physicians’ drug administration wRVUs.

However, according to the complaint, “the new work RVU for drug administration in the hospital department” was not calculated based on physician work, clinical expense, or malpractice overhead, but rather was “solved for” by working backwards from a desired level of overall compensation.” Moreover, according to the complaint, the compensation amount for the physician supervision work at the infusion center was approximately 500 percent of the wRVU for in-clinic work where the physician was actively involved in patient care. The DOJ contended that this was a violation of the Stark Law, as the compensation was not fair market value, nor was it commercially reasonable. Additionally, the complaint included allegations of both Stark and Anti-kickback Statute violations for the funds transferred as “management fees” from the Hospital to the Clinic to fund the higher physician compensation amounts, as the fees also allegedly were not fair market value nor commercially reasonable.

The Mercy settlement is only the most recent example of a health system incurring liability for improper wRVU-based compensation arrangements. In an analogous settlement made in 2015, Broward Health in Florida agreed to pay $70 million to resolve a whistleblower lawsuit that alleged Stark Law violations.  In part, it was alleged that Broward Hospital permitted high-volume referring physicians to artificially inflate their wRVUs and, in turn, their compensation.[2]  Allegedly, this was accomplished through unbundling procedures, not considering modifiers that would reduce the compensation for multiple procedures performed, and giving wRVU credits for unsupervised PAs and NPs.  These tactics allegedly resulted in so-called “implausible” wRVU numbers for certain physicians.

These settlements are not an expression of the government’s disapproval of wRVU based compensation arrangements. Rather, these are examples of alleged arrangements that artificially increased a physician’s compensation for referrals, in a manner that is not consistent with fair market value and commercial reasonableness.  Thus, it is important to ensure that wRVU based compensation arrangements are properly structured as well as properly implemented.

Endnotes:

[1] See 42 C.F.R. § 411.352(i)(3)(i) (permitting group practice productivity bonuses based on a per-wRVU basis).

[2] See Relator’s Compl., United States ex rel. Reilly v. N. Broward Hosp. et al., No. 10-60590, ¶ 11 (S.D. Fla. Sept. 16, 2015), ECF No. 75.

Recently, Judge Robert T. Conrad, Jr. of the United States District Court for the Western District of North Carolina (Charlotte Division), rejected efforts by The Charlotte- Mecklenberg Hospital Authority, doing business as the Carolinas Health Care System (“CHS”), to dismiss, at the pleadings stage, a complaint filed by the United States’ Antitrust Division of the Department of Justice, and the State of North Carolina, asserting that CHS’s anti-steering provisions in its payer contracts unreasonably restrain trade in violation of section 1 of the Sherman Act. Recognizing the Court’s limited review of preliminary motions, Judge Conrad, in the matter styled as United States of America et al v. The Charlotte-Mecklenberg Hospital Authority d/b/a Carolinas Health Care System, Civil Action No.3:16-cv-00311-RJC-DCK (W.D. N.C., Mar. 30,2017), ultimately concluded that the allegations of the Complaint, taken as true for purposes of ruling on the motion, asserted a claim that was “plausible,” meeting the pleading standards established by the Supreme Court in Bell Atlantic Corp. v. Twombly, 550 U.S. 544,570 (2007).

The complaint alleges that CHS is the largest hospital system in the Charlotte, North Carolina area, operating ten acute-care hospitals and garnering a market share of fifty percent (50%). CHS’s next closest competitor is alleged to have only half the number of acute-care hospitals, and less than half of CHS’s annual revenue. The complaint also alleges that “[a]n insurer selling health insurance plans to individuals and employees in the Charlotte area must have CHS as a participant in at least some of its provider networks, in order to have a viable health insurance business in the Charlotte area.” Based on these purported facts, the Complaint alleges that CHS maintains “market power” for the sale of acute care hospital services in the Charlotte area.

The complaint goes on to assert that CHS maintains anti-steering provisions in many of its payer contracts including those that collectively insure up to eighty-five percent of the insured residents in the Charlotte area. Furthermore, it is alleged that CHS is able to demand these provisions as a result of its market power.

Finally, the Complaint alleges that these anti-steering provisions impose an unreasonable restraint on competition. Among other things, these provisions have the effect of preventing payers from directing patients to lower cost, higher quality providers, and even prohibit payers from providing its enrollees with information about their health care options. The ultimate effect of these provisions is to allow CHS to maintain its dominant position in the market, and maintain supra competitive prices.

CHS filed an Answer to the Complaint, and a motion on the pleadings which is governed by the same standards as a motion to dismiss filed under Federal Rule of Civil Procedure 12 (b) (6). The essence of CHS’s motion is that the Plaintiff’s allegations were conclusory, and, in particular, the Complaint lacked factual allegations that show “actual competitive harm” resulting from the anti-steering provisions. In addition, CHS argued that: the steering restrictions were beneficial and procompetitive; CHS’s prices were higher due to superior product and consumer loyalty; payers were still able to steer and no payer had ever asked to remove the steering provisions. CHS also relied upon the recently issued Second Circuit decision in United States v. American Express Co., 838 F. 3d 179 (2d. Cir 2016), which ultimately rejected a lower Court’s finding, after a bench trial, that similar steering provisions were unlawful.

Judge Conrad ultimately concluded that while many of the allegations in the Complaint were conclusory, and not factual, the Plaintiff had sufficiently alleged anticompetitive harm. In particular, the Complaint contains plausible allegations that CHS maintains market power, and that as a result of this market power CHS is able to force the anti-steering provisions on payers resulting in CHS’s ability to charge supra-competitive prices. Judge Conrad rejected CHS’s additional factual arguments concluding that these were not appropriate arguments to address on a preliminary motion.

Finally, Judge Conrad rejected the invitation to compare the case before him with that of United States v. American Express. In doing so, Judge Conrad noted: 1) he was not bound by a decision of the Second Circuit; 2) the health care industry is different from the credit card industry; and 3) the case before him was still in the preliminary stages while United States v. American Express was decided after discovery and a full trial on the merits.

In 2016, the populist trend in American politics was an undeniable factor behind Trump’s election victory as well as the ascendancy of Bernie Sanders and Elizabeth Warren within the Democratic Party.  During upcoming months, industry observers will be looking for signs as to whether drug pricing is an area in which both parties can agree on instituting significant legislative action at the state and federal levels.  The nature and shape of any such reforms will be highly consequential for the U.S. pharmaceutical industry, which has served as a prime source of innovation in medicine.  The question going forward is whether cool-headed reform that facilitates patient access to drugs without stymying pharmaceutical R&D investment can be achieved in an era of fervent populism and discontent over rising healthcare costs.

For more, see Politics, Populism, and the Future of Prescription Drug Pricing Reform in PharmaExec.com.