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Posted on March 9, 2010 by Joseph W. Metro

Office of Pharmacy Affairs Publishes Final Notice Allowing Covered Entities to Use Multiple Contract Pharmacies

This post was written by Elizabeth O’Brien and Joseph W. Metro.

On March 5, 2010, the Office of Pharmacy Affairs published a Final Notice allowing covered entities to use multiple contract pharmacies in order to supplement “in-house” pharmacy services or to increase patient access to 340B drugs. This Final Notice replaces “Notice Regarding Section 602 of the Veterans Health Care Act of 1992; Contract Pharmacy Services (61 Fed. Reg. 43,549) and all other previous 340B Program guidance regarding non-network contract pharmacy services.

Under the Public Health Service Act’s Section 340B drug pricing program, manufacturers who sell covered outpatient drugs to specific federal grantees, federally-qualified health center look-alikes and qualified disproportionate share hospitals (“covered entities”) must agree to charge less than the statutorily-prescribed maximum price for those drugs, which results in significant savings on drugs for the covered entities. Previously, the Health Resources and Services Administration ("HRSA") Office of Pharmacy Affairs had specified procedures under which discounts could be made available to covered entities engaging a single contract pharmacy, and had conducted an Alternative Methods Demonstration Project program in which HRSA approved a limited number of covered entities using multiple contract pharmacies.

Effective April 5, 2010, the Final Notice permits all covered entities to use multiple contract pharmacies. The guidelines in the Final Notice give covered entities and contract pharmacies a great deal of freedom in structuring their contract pharmacy services agreements, so long as they implement and maintain mechanisms to ensure compliance with 340B Program rules, especially against diversion of drugs. To learn more about the Final Notice, including compliance guidelines, potential alternatives to the single location/single pharmacy model and suggested contract provisions, read the full alert.

Posted on February 17, 2010 by Debra A. McCurdy

CMS Clarifies Telemarketing Rules for DME Suppliers

This post was written by Elizabeth B. Carder-Thompson and Debra A. McCurdy.

The Centers for Medicare & Medicaid Services (CMS) has issued new "Telemarketing FAQs" to supplement the Office of Inspector General's (OIG) recent revisions to its Special Fraud Alert on Telemarketing by Durable Medical Equipment Suppliers. As you may recall, in January 2010, the OIG amended the Special Fraud Alert to add a warning about suppliers contacting a beneficiary before the supplier receives written beneficiary consent, as it may violate the statutory provision that prohibits Durable Medical Equipment (DME) suppliers from making unsolicited telephone calls to Medicare beneficiaries regarding the furnishing of a Medicare-covered item. Specifically, the OIG stated that it "has also been made aware of instances when DME suppliers, notwithstanding the clear statutory prohibition, contact Medicare beneficiaries by telephone based solely on treating physicians’ preliminary written or verbal orders prescribing DME for the beneficiaries." According to the OIG, the "physician’s preliminary written or verbal order is not a substitute for the requisite written consent of a Medicare beneficiary."

In response to this new language, Reed Smith contacted the OIG to discuss the adverse impact this policy would have on timely beneficiary access to medically necessary equipment ordered by a physician, since some suppliers call a beneficiary to arrange for equipment deliveries upon receiving an initial physician verbal order. The OIG has just sent us a copy of new CMS Telemarketing FAQs that seek to clarify certain aspects of the revised Special Fraud Alert. Notably, CMS clarifies that there are circumstances in which a supplier may contact a beneficiary based on receipt of a physicians' order if the physician contacts the supplier with the beneficiary's knowledge:

Question 3: Is a supplier contacting the beneficiary based on the receipt of a physician order considered an “unsolicited” contact?

Answer 3: If a physician contacts a supplier on behalf of a beneficiary with the beneficiary’s knowledge, and then a supplier contacts the beneficiary to confirm or gather information needed to provide that particular covered item (including delivery and billing information), then that contact would not be considered “unsolicited.” Please note that the beneficiary need only be aware that a supplier will be contacting him/her regarding the prescribed covered item, recognizing that the appropriate supplier may not have been identified at the time of consultation.

On the other hand, if the beneficiary is not aware that the physician would be contacting the supplier on the beneficiary's behalf, the contact may be prohibited.

Question 4: What if a supplier contacts the beneficiary based solely on the physician order (and therefore the contact is without the beneficiary’s knowledge that the physician would be contacting a supplier on the beneficiary’s behalf)?

Answer 4: Then that contact would be considered “unsolicited” and, depending on the facts and circumstances of the particular case, may be prohibited.

Tags: Centers for Medicare and Medicaid (CMS), DMEPOS, Fraud & Abuse, Health Care, Medicare & Medicaid, Office of Inspector General (OIG)

Posted on August 5, 2009 by Lisa Baird

Stark Law Changes Will Go Into Effect October 1, 2009

As as an update to our last post on the Stark Law changes adopted in the 2009 Hospital Inpatient Prospective Payment System final rule, additional changes to the Stark Law regulations will go into effect on October 1, 2009, causing many “under arrangements” relationships between hospitals and physician-owned, third party service providers to fall out of compliance. In addition, new rules governing the compensation terms of lease agreements involving physicians will become effective on the same date. As existing arrangements will not be grandfathered, the final rule’s new restrictions will force many arrangements between physicians and hospitals, particularly hospital/physician joint ventures, to be restructured or noncompliant arrangements abandoned. Parties are encouraged to revise potentially noncompliant arrangements. To read the full alert written by Reed Smith attorneys Daniel Cody and Paul Pitts, click here.

Tags: 2009 Hospital Inpatient Prospective Payment System Final Rule, Centers for Medicare and Medicaid (CMS), Health Care, Stark Law

Posted on August 3, 2009 by Lisa Baird

Medicare Secondary Payer Law: New Registration And Reporting Requirements Strengthen Existing Duties And Obligations

This post was written by Carol C. Loepere, Erik T. Atkisson and Catherine A. Hurley.

The Medicare secondary payer (“MSP”) law requires Medicare to be the “secondary” payer of health benefits for Medicare beneficiaries where another entity is the “primary” payer of health benefits. Determining whether another entity is “primary” and when Medicare is “secondary” has often been difficult due to the wide range of circumstances in which another party may be responsible for a Medicare beneficiary’s health expenses, the number of potential parties involved, and the somewhat confusing terminology in the law itself. As a result, Congress enacted new rules to enhance the enforcement of the MSP law. Any entity that might pay settlements to Medicare-eligible plaintiffs that would cover any health expenses, or might otherwise compensate Medicare beneficiaries for health expenses as part of group health insurance, workers’ compensation, or any other arrangement or plan, needs to become familiar with these new rules. Specifically, Congress now requires such entities to (1) register as a responsible reporting entity (“RRE”), and (2) electronically report information to the Centers for Medicare & Medicaid Services (“CMS”).CMS will use this information to track and recover health expenses it incurred on behalf of Medicare beneficiaries but that another entity, as a primary payer under the existing MSP requirements, may be responsible for paying. To read the full alert, click here.

Update: For more information about this topic from an insurance industry perspective, please check out the Reed Smith Policyholder Perspective blog.

Tags: Centers for Medicare and Medicaid (CMS), MMSEA, Mandatory Reporting, Medicare, Medicare secondary payer (MSP), Regulatory Developments, Section 111

Posted on July 9, 2009 by Karl A. Thallner

CMS Proposes to Relax Controversial Physician Supervision Requirements for Hospital Outpatient Services

On July 1, 2009, the Centers for Medicare & Medicaid Services (“CMS”) proposed to relax its controversial position concerning physician supervision of hospital outpatient services. The hospital industry had recently been vocal in its objection to CMS’s position, and the latest proposal signifies a potential important win for hospitals. If adopted, hospitals will be able to meet Medicare supervision requirements for outpatient services, without incurring some of the high costs necessary to ensure physician presence while those services are furnished.

The July 1 proposal is contained in CMS’s hospital outpatient prospective payment system (“HOPPS”) rule for 2010. The controversy arose a year earlier in CMS’s HOPPS rule for 2009. In the 2009 HOPPS rule, CMS “clarified” that direct supervision by a physician is required for outpatient hospital therapeutic services furnished “incident to” a physician’s services – not only in an off-campus hospital-based location, but also in the main hospital building or an on-campus department. This means that a physician must be present in each provider-based department when these services are furnished. While styled as a clarification, most hospitals saw CMS’s position in the 2009 HOPPS rule as a significant change from prior CMS guidance. Specifically, in the original HOPPS regulations from 2000, while CMS required that services furnished at a location designated as a department of a provider under the Medicare “provider-based” rules must be furnished under the direct supervision of a physician, CMS also stated that it “assumed” that the direct supervision requirement would be met when the services are furnished on a hospital’s campus.

In the latest proposal, CMS articulated three new proposed policies for physician supervision for hospital outpatient services that would go into effect Jan. 1, 2010.

First, nonphysician practitioners (physician assistants, nurse practitioners, clinical nurse specialists, and certified nurse-midwives) would be permitted to directly supervise all hospital outpatient therapeutic services that they may perform themselves in accordance with state law, and scope of practice, hospital-granted privileges, and other Medicare requirements.
Second, for outpatient services furnished in the hospital or in an on-campus outpatient department of the hospital, the “direct supervision” requirement would be met if the physician or nonphysician practitioner is present on the same campus, in the hospital or on-campus provider-based department, and is immediately available to furnish assistance and direction throughout the performance of the procedure.
Third, for hospital outpatient diagnostic services, the physician supervision requirements attributable to each particular test under the Medicare physician fee schedule would have to be satisfied, whether the test is performed directly or under arrangements. While the same definition of “direct supervision” applicable to therapeutic services would also apply to diagnostic tests, nonphysician practitioners would not be permitted to supervise diagnostic tests.

These changes would allow hospitals significantly more flexibility in meeting the supervision requirements, and would represent a relaxation not only from CMS’s policy articulated in the 2009 HOPPS rule, but in some respects also from CMS’s policy prior to 2009. In particular, for example, nonphysician practitioners will be able to supervise therapeutic services furnished in off-campus provider-based departments.

An advance copy of the proposed 2010 HOPPS rule, which is scheduled to be published in the Federal Register July 20, 2009, is available here. Hospitals desiring to comment on the proposal must do so by Aug. 31, 2009. The final HOPPS rule is likely to be released in December 2009. Hospitals should monitor regulatory developments in this area in order to be able to adjust physician and nonphysician staffing and scheduling of services accordingly.

Tags: Centers for Medicare and Medicaid (CMS), Hospitals, Medicare, Regulatory Compliance, Regulatory Developments

Posted on October 16, 2008 by Debra A. McCurdy

Health Industry Washington Watch Regulatory and Legislative Developments

Regulatory and legislative developments posted on Health Industry Washington Watch include:

Regulatory Developments. The Agency for Healthcare Research and Quality (AHRQ) and the HHS Office for Civil Rights have announced the availability of an interim guidance document entitled “Implementing the Patient Safety and Quality Improvement Act of 2005, Including How to Become a Patient Safety Organization.'' The Centers for Medicare & Medicaid Services (CMS) has published a notice soliciting comments on the Medicare Part D/Medicare Advantage Calendar Year (CY) 2010 Bid Pricing Tool and the CY 2010 Plan Benefit Package software and formulary submission.
Other CMS Developments. CMS has released details on the scoring methodology it uses to identify those nursing homes that become candidates for the “Special Focus Facility” initiative by virtue of their more serious history of severe and persistent quality of care problems. The agency also is soliciting comments regarding an interim study of options for revising geographic location adjustments under the Medicare physician fee schedule. In addition, CMS has posted Medicare Part D prescription drug plan and Medicare Advantage health plan information for 2009 online.
Legislative Developments. President Bush recently signed into law a number of health bills, including legislation to restrict internet pharmacy sales, increase funding for health centers, and expand disease research, among others.
Odds & Ends. The Food and Drug Administration (FDA) has released a draft guidance document on “Potency Tests for Cellular and Gene Therapy Products.” The Government Accountability Office (GAO) has issued reports examining the FDA’s advisory committee processes and reviewing how nonprofit hospitals meet community benefit requirements. The AHRQ's Technology Assessment Program will be posting draft reports on its website, including an upcoming report on "Potential Conflict of Interest in the Production of Drug Compendia." In addition, CMS is encouraging hospitals and other health care providers to review a new publication, “Community Pan-Flu Preparedness: A Checklist of Key Legal Issues for Healthcare Providers."
Upcoming Events. CMS is hosting a Special Open Door Forum for physicians on the Medicare Medical Home Demonstration project. The agency also is holding a Prescription Drug Event Symposium at CMS headquarters in Baltimore for researchers and other interested parties. In addition, CMS will host a series of national provider calls regarding issues associated with the adoption of the ICD-10 coding system.

Tags: Centers for Medicare and Medicaid (CMS), Food and Drug Administration (FDA), Legislative Developments, Regulatory Developments

Posted on October 7, 2008 by Debra A. McCurdy

New Postings on the Reed Smith Health Industry Washington Watch Blog

The Reed Smith Health Industry Washington Watch blog has been updated to discuss a variety of regulatory and legislative developments of interest to the life sciences and health industry, including the following:

Legislative Developments: President Bush signed into law mental health parity legislation and funding for HHS and other federal agency programs through March 6, 2009. Congress also has cleared online pharmacy and organ transplant bills that now await the President's signature.
CMS Developments: A new CMS initiative to combat Medicare DMEPOS and home health fraud and abuse; CMS guidance on Medicare payment of certain routine costs associated with clinical trials; CMS release of “Medically Unlikely Edits” used by Medicare contractors to prevent payment for excessive services; and waiver of certain hospital quality reporting requirements in hurricane areas.
Regulatory Developments: Revised FY 2008 Medicare hospital inpatient PPS rates; solicitation of members for the DMEPOS competitive bidding advisory committee; a final rule on Medicaid self-directed personal assistance services; a final rule revising the Medicaid definition of "multiple source drug"; and FDA reporting requirements for authorized generics.
OIG and GAO Developments: The OIG has released its FY 2009 Work Plan, supplemental compliance program guidance for nursing facilities, and reports on nursing home deficiencies. The GAO has issued reports on trends in Medicare imaging services and hospital-associated infections.
Upcoming Events: CMS is hosting a conference on DMEPOS supplier accreditation and provider calls on adoption of the ICD-10 coding system.

For details on these and other health industry developments, please visit healthindustrywashingtonwatch.com.

Tags: Centers for Medicare and Medicaid (CMS), DMEPOS, Legislative Developments, Medicaid, Medicare, Reimbursement

Posted on August 27, 2008 by Lisa Baird

Preemption - It's Not Just For Product Liability Anymore

This post was written by Michelle Lyu.

Earlier this week, in Uhm v. Humana, Inc., --- F.3d --- , 2008 WL 3891592, No. 06-35672 (9th Cir. Aug. 25, 2008), the Ninth Circuit upheld a lower court ruling that the express preemption provision of the Medicare Prescription Drug Improvement and Modernization Act preempted state law claims arising from the plaintiffs' prescription drug benefits provided by a Medicare supplement insurer.

On behalf of a putative class, plaintiffs asserted claims for breach of contract, violation of state consumer protection statutes, unjust enrichment, and fraud arising from allegations that the class enrolled in a plan for prescription drug coverage but the insurer failed to cover their prescription medication purchases as promised. But the Act specifies that for Medicare prescription drug plans and sponsors, "[t]he standards established under this part shall supercede any State law or regulation (other than State licensing laws or State laws relating to plan solvency) with respect to MA ["Medicare Advantage"] plans which are offered by MA organizations under this part." 42 U.S.C. § 1395w-26(b)(3).

Based on this statutory express preemption clause, the Ninth Circuit affirmed that the "plain language of the statute" meant that CMS "standards" will supercede state law or regulations that are " 'with respect to' a 'prescription drug plan' offered by a '[prescription drug plan] sponsor.' " Id. at p. 11557-58. Because the plaintiffs' claims boiled down to a question of whether they were properly enrolled in the insurer's prescription drug plan and then afforded the promised coverage, their claims were explicitly governed by procedures and remedies contained in the Act only, and their civil lawsuit was preempted.

Notwithstanding the relatively straightforward statutory analysis employed by the court, the case contains additional observations with implications for preemption in other contexts.

For one, the court noted that while express preemption provisions may reach beyond positive enactments to embrace common law duties (see, e.g., Bates v. Dow Agrosciences L.L.C., 544 U.S. 431, 443 (2005)), the court noted that it also was not "categorically precluded" from applying implied preemption principles to determine what Congress intended to preempt - in other words, would the state law action differing from federal standards stand as an obstacle to the accomplishment and execution of a federal scheme? Id. at p. 11559. At the same time, the court discounted the possibility of field preemption since the express preemption provision itself contains reference to exceptions to the Act's preemption reach (i.e., state licensing laws or state laws relating to plan solvency).

In addition, the court's analysis of the claims involving deceptive marketing could be relevant to other preemption contexts, such as with prescription drug advertising where the FDA's Division of Drug Marketing, Advertising, and Communications often pre-screen drug promotional materials to ensure they are not false and misleading. In Uhm, the plaintiffs' deceptive marketing claims centered on the alleged deceptive marketing and advertising that allegedly induced the plaintiffs to enroll in the prescription drug plan. Id. at p. 11570. The Ninth Circuit held that these claims were preempted, noting that "the Act provides that [the agency overseeing the Medicare and Medicaid Services] must approve all [prescription drug plan] marketing materials before they are made available to [M]edicare beneficiaries." Therefore, because the regulations will not permit approval of marketing materials or enrollment forms that are "materially inaccurate or misleading or otherwise make material misrepresentations," claims based on the materials' alleged deceptiveness were preempted. Id.

Tags: Centers for Medicare and Medicaid (CMS), Consumer Protection Statutes, Medicare Improvements for Patients and Providers Act (MIPPA), Preemption, Riegel

Posted on August 25, 2008 by Heather M. Zimmerman

Significant Stark Law Changes Adopted in the 2009 IPPS Final Rule

This post was written by Heather M. Zimmerman, Karl A. Thallner, Jr, Thomas W. Greeson, Gina M. Cavalier, Daniel A. Cody, Brad Rostolsky, and Paul Pitts.

I. INTRODUCTION

On Aug. 19, 2008, the Centers for Medicare & Medicaid Services (“CMS”) published a final rule to implement the Fiscal Year 2009 Hospital Inpatient Prospective Payment System (the “2009 IPPS final rule”). 73 Fed. Reg 48433. The IPPS final rule includes significant changes to the federal Physician Self-Referral Law, or “Stark Law,” regulations. Under the Stark Law, if a physician or a member of a physician’s immediate family has a financial relationship with an entity, the physician may not make referrals to that entity for the furnishing of certain “designated health services” (“DHS”) under Medicare, unless an exception applies. If a physician makes a prohibited referral for DHS, the entity is prohibited from seeking or keeping payment from Medicare for the DHS. The IPPS final rule adopts as final, numerous changes to the Stark Law regulations that were proposed in the 2009 Hospital Inpatient Prospective Payment System proposed rule (“2009 IPPS proposed rule”), as well as changes that were proposed in the 2008 Medicare Physician Fee Schedule proposed rule (“2008 MPFS proposed rule”) and adopted as final in the September 2007 Stark Law, Phase III regulations (“Phase III”).

The following changes have a delayed effective date of Oct. 1, 2009, since they have the potential to substantially impact joint venture arrangements between physicians and hospitals, and may require the parties to restructure or dissolve existing financial arrangements in order to bring them into compliance with the Stark Law:

Prohibition on the use of percentage-based compensation formulae for equipment and office lease arrangements.
Prohibition on the use unit-of-service (“per click”) payments in office space and equipment lease arrangements to the extent the payments reflect referrals between the parties.
The expanded definition of “entity” to include not only the entity that submits claims to Medicare for DHS, but also the “person or entity that performs the DHS” in an effort to restrict the provision of DHS to hospitals by physician or physician organizations “under arrangements.”

Other changes to the Stark Law regulations that become effective Oct. 1, 2008 include:

Revisions to the “stand in the shoes” provisions.
Requirement that hospitals disclose to patients on request, physician-ownership.
Requirement that hospitals disclose financial relationships with physicians.
Revisions to the exception for payment of obstetrical malpractice insurance subsidies.
Clarification regarding physician ownership in a retirement plan.
Creation of a new exception for technical non-compliance with signature requirements.
Definition of a “period of disallowance.”
Requirement that in an appeal action, the burden of proof for establishing that DHS was not furnished pursuant to a prohibited referral is on the DHS entity.

This Client Alert describes the key provisions of the 2009 IPPS final rule and provides our commentary on aspects of the proposals that we expect to be of greatest interest to our clients.

Tags: Centers for Medicare and Medicaid (CMS), Health Care, Stark Law

Posted on August 5, 2008 by Lisa Baird

Under Construction: The Medicare Clinical Trial Policy

A lesser-known provision in the Medicare Program allows payment for "reasonable and necessary" items or services provided through clinical trials. At the same time, even for traditional reimbursement, the Centers for Medicare & Medicaid Services (CMS) increasingly is demanding evidence of effectiveness in the Medicare population, rather than simply in the general population, to support a coverage decision. The federal government has sought, often without much success, to increase participation by Medicare recipients in clinical trials, because Medicare recipients traditionally have been underrepresented in research populations--meaning the very evidence CMS seeks for traditional reimbursement often does not exist. Developments regarding these reimbursement policies by CMS are the subject of an informative and timely article for the FDLI UPDATE by Reed Smith attorney Kathleen McGuan.

Tags: Centers for Medicare and Medicaid (CMS), Clinical Trials, Medicare, Reimbursement

Posted on July 28, 2008 by Debra A. McCurdy

The "Medicare Improvements for Patients and Providers Act of 2008": Delay and Reform of the Medicare DMEPOS Competitive Bidding Program

This post was written by Debra A. McCurdy, Carol Loepere, Elizabeth Carder-Thompson, Robert J. Hill and Kathleen McGuan.

I. INTRODUCTION

On July 15, 2008, the House and Senate overrode President Bush’s veto of H.R. 6331, the “Medicare Improvements for Patients and Providers Act of 2008” (“MIPPA”).¹ Among many other things, MIPPA delays and reforms the Centers for Medicare & Medicaid Services’ (“CMS”) controversial competitive bidding program for certain categories of durable medical equipment, prosthetics, orthotics and supplies (“DMEPOS”), which had already gone into effect in 10 geographic areas on July 1, 2008.

Specifically, MIPPA:

Terminates contracts awarded under round one, requires CMS to rebid those areas in 2009, and delays bidding for round two until 2011;
Finances the delay by cutting fee schedule payments for all items covered by round one of the bidding program by 9.5 percent nationwide beginning January 1, 2009, followed by a 2 percent increase (in addition to regular inflation updates) in 2014, except where bidding is in effect or CMS has otherwise adjusted rates;
Adds a series of procedural improvements to the bidding process, including a requirement that CMS notify bidders in the case of certain missing financial documentation; and
Addresses quality by, among other things: requiring subcontractor accreditation; excluding complex rehabilitation wheelchairs and negative pressure wound therapy from bidding;; exempting certain rural and low-population areas from bidding; and requiring CMS to issue regulations before using its authority to adjust prices in non-bid areas.

These provisions are effective June 30, 2008, unless otherwise noted.

CMS has instructed suppliers that as a result of the new law, items that had been included in the first round of the DMEPOS competitive bidding program can be furnished by any enrolled DMEPOS supplier in accordance with existing Medicare rules, and Medicare will pay for DMEPOS items in bidding areas using the standard DMEPOS fee schedule amounts, retroactive to June 30, 2008. Nevertheless, given that the program was in effect for two weeks before the legislation was enacted, certain operational and legal questions have been raised.

This memorandum provides a summary of the DMEPOS bidding provisions of the new law and discusses CMS guidance issued to date. We would be pleased to answer any further questions you may have.

II. BACKGROUND ON DMEPOS COMPETITIVE BIDDING

A. Statutory Background

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”) required the Secretary of the Department of Health and Human Services (“HHS”) to implement competitive acquisition programs for DMEPOS beginning in 2007. Eligible products included: (1) DME (including DME used with infusion and drugs, other than inhalation drugs) and supplies used in conjunction with DME; (2) enteral nutrients, equipment, and supplies; and (3) off-the-shelf orthotics. The MMA excluded from competitive acquisition inhalation drugs; parenteral nutrients, equipment, and supplies; and Class III devices. Moreover, the Secretary was permitted to exempt rural areas and areas with low population density in urban areas (unless there was a significant national market through mail order for particular items), and items and services unlikely to result in significant savings.

The statute directed the Secretary to establish competitive bidding areas (“CBAs”), which could differ for different items and services. Competitive acquisition was scheduled to be phased in geographically, applying to 10 of the largest metropolitan statistical areas (“MSAs”) in 2007, a total of 80 MSAs in 2009, and additional MSAs thereafter. The Secretary also could phase in competitive acquisition programs first among the highest cost and highest volume items and services or those that have the largest savings potential.

For each competitive acquisition area, the Secretary must solicit bids by suppliers to supply certain covered items. Only successful bidders could supply the covered items in the CBA, and they would be reimbursed based on the bid amount. The Secretary was required to ensure that small suppliers had the opportunity to be considered for participation under the program.

In order to be awarded a contract, bidding entities had to meet quality standards for suppliers, along with financial standards specified by the Secretary. Total amounts paid under the contracts were expected to be less than would be paid otherwise, and beneficiary access to multiple suppliers would have to be maintained. The Secretary could limit the number of contractors in a competitive acquisition area to the number needed to meet projected demand.

CMS published its final rule to implement the DMEPOS competitive bidding program on April 10, 2007. ²

B. CMS Bidding Activities

CMS conducted the first round of DMEPOS competitive bidding last summer, and the deadline for bidding was September 25, 2007. The first round covered the following 10 MSAs: (1) Charlotte-Gastonia-Concord, NC-SC; (2) Cincinnati-Middletown, OH-KY-IN; (3) Cleveland-Elyria-Mentor, OH; (4) Dallas-Fort Worth-Arlington, TX; (5) Kansas City, MO-KS; (6) Miami-Fort Lauderdale-Miami Beach, FL; (7) Orlando-Kissimmee, FL; (8) Pittsburgh, PA; (9) Riverside-San Bernardino-Ontario, CA; and (10) San Juan-Caguas-Guaynabo, PR.

Ten categories of DMEPOS were included in phase one: (1) Oxygen Supplies and Equipment; (2) Standard Power Wheelchairs, Scooters, and Related Accessories; (3) Complex Rehabilitative Power Wheelchairs and Related Accessories; (4) Mail-Order Diabetic Supplies; (5) Enteral Nutrients, Equipment, and Supplies; (6) Continuous Positive Airway Pressure Devices, Respiratory Assist Devices, and Related Supplies and Accessories; (7) Hospital Beds and Related Accessories; (8) Negative Pressure Wound Therapy Pumps and Related Supplies and Accessories; (9) Walkers and Related Accessories; and (10) Support Surfaces (Group 2 mattresses and overlays), although this category was subject to bidding only in Miami-Fort Lauderdale-Miami Beach, FL and San Juan-Caguas-Guaynabo, Puerto Rico.

Moreover, in January 2008, CMS announced the 70 MSAs (include the three largest MSAs ‑ New York, Los Angeles, and Chicago) and eight product categories that it intended to include in the second round of competitive bidding. CMS planned to bid eight of the 10 product categories from round one in the second round: (1) Oxygen Supplies and Equipment; (2) Standard Power Wheelchairs, Scooters, and Related Accessories; (3) Complex Rehabilitative Power Wheelchairs and Related Accessories; (4) Enteral Nutrients, Equipment, and Supplies; (5) Continuous Positive Airway Pressure Devices, Respiratory Assist Devices, and Related Supplies and Accessories; (6) Hospital Beds and Related Accessories; (7) Negative Pressure Wound Therapy Pumps and Related Supplies and Accessories; and (8) Walkers and Related Accessories. Note that although diabetes supplies were not listed in this round of bidding, CMS officials indicated in a January 8, 2008 press conference that they were preparing to conduct nationwide competitive bidding for diabetes supplies in the future. ³

On March 20, 2008, CMS announced the winning bid prices for the first round of competitive bidding, with reimbursement averaging 26 percent below Medicare fee schedule amounts. Moreover, on May 19, 2008, CMS released the names of the 325 suppliers that had signed contracts with Medicare to provide competitively bid DMEPOS items in the first round of competitive bidding, effective July 1, 2008. There were widespread concerns about the way the bidding process was handled, however, including confusing and contradictory guidance provided to suppliers during the bidding process, the questionable disqualification of numerous suppliers due to missing financial data, the awarding of contracts to suppliers without established businesses in the particular geographic region (since technically a supplier did not have to be located in the CBA to submit a bid), the adequacy of beneficiary and supplier education efforts, and the potential negative impact of the program on beneficiary access to DMEPOS. These concerns prompted Congress to intervene to delay implementation of the first round of the program and make a series of changes to improve the process in the future.

III. MIPPA DMEPOS COMPETITIVE BIDDING PROVISIONS

A. New Timetable for Competitive Bidding Program

MIPPA terminates the contracts awarded under round one of the competitive bidding program, which had gone into effect July 1, 2008. Reimbursement to DMEPOS suppliers in the 10 CBAs reverts to the fee schedule amounts applicable prior to July 1, and all otherwise-eligible DMEPOS suppliers may furnish DMEPOS supplies in these areas regardless of whether they participated in the bidding process.

The Secretary is directed to rebid the first round in 2009, covering the same geographic areas and same products as previously selected, subject to the following modifications: (1) the Secretary must exclude Puerto Rico (resulting in the “new” first round covering nine rather than 10 MSAs); and (2) negative pressure wound therapy items and services are excluded from round one. Note that the legislation is not specific as to when in 2009 the competition must occur or when bid prices will actually go into effect.

With regard to termination of winning round one contracts, MIPPA specifies that no Medicare payment will be made under those contracts on or after the date of the enactment (July 15, 2008). MIPPA provides that “to the extent that any damages may be applicable as a result of the termination of such contracts,” such damages will be paid from the Medicare trust fund. The law stipulates that this language should not be construed as providing an independent cause of action or right to administrative or judicial review with regard to the terminated contract. No guidance has yet been issued regarding how a supplier could petition for damages or the extent, if any, of financial relief. It is unclear at this time how viable it will be for suppliers to pursue relief under this provision or what CMS would consider to be reimbursement “damages.” CMS could be expected to argue that damages are not applicable because the standard contract included language noting that the contract was subject to changes in Medicare statute. This issue ultimately may be decided through litigation.

MIPPA delays round two bidding from 2009 to 2011, and clarifies the statutory language to specify that this competition shall take place in “an additional 70” areas, plus the nine MSAs in round one, rather than in 80 areas. The MSAs in the second round must be those that the Secretary announced earlier in 2008, although the Secretary may subdivide MSAs with populations of at least 8 million into separate CBAs.

MIPPA allows the Secretary to extend the program to additional areas after 2011, although national mail order bidding could take place after 2010. In implementing these future rounds, the Secretary must exempt from bidding (except for a national mail order program) the following areas: (1) rural areas; (2) MSAs not selected under rounds one or two with a population of less than 250,000; and (3) certain low population density areas within an MSA that is otherwise selected for bidding.

B. Reforms to the Competitive Bidding Program and Bidding Process

In light of widespread criticism regarding the way CMS and its contractor conducted the competitive bidding, including the methodology for establishing payments, the inclusion of complex medical equipment in bidding, the mechanics of bidding, the exclusion of numerous bidders for supposedly insufficient documentation, questions regarding the experience and qualifications of certain selected suppliers, and other aspects of the bidding program, MIPPA includes a series of provisions generally supported by industry designed to improve the bidding program.

1. Supplier Feedback on Missing Financial Documentation

MIPPA establishes a process for CMS to notify a supplier regarding missing financial documentation if certain circumstances are met. Documents covered by this provision include financial, tax, or other such documents relating to supplier financial standards. The provision does not require notification regarding other documentation, such as the bid itself or accreditation documentation.

Under this provision, if a supplier submits a bid by the “covered document review date,” CMS must inform the supplier if a required financial document is missing within 45 days of the covered document review date (or within 90 days in subsequent rounds of bidding). The covered document review date is defined as the later of (1) 30 days before the bidding deadline; or (2) 30 days after the beginning of the bidding period. In such cases, CMS may not reject the bid on the basis of the missing documentation if all documents identified in the notice to the bidder are submitted within 10 business days after the notice date.

This provision applies only to the timely submission of covered documents, and does not apply to any determination as to the accuracy or completeness of the submitted documents or whether such documents meet applicable requirements. It also does not prevent the Secretary from rejecting a bid for other reasons (i.e., on the basis of the bid amount), nor does it permit a bidder to change bidding amounts or to make other changes in a bid submission.

2. Modification of Accreditation Requirements

By way of background, the MMA required the Secretary to establish and implement quality standards for Medicare DME suppliers, to be applied by recognized independent accreditation organizations. In August 2006, CMS released final supplier quality standards, and all suppliers eventually will be required to comply with these quality standards in order to furnish any Medicare Part B DMEPOS item or service and to receive and retain a supplier billing number.⁴ CMS generally has been phasing in the accreditation requirement in conjunction with implementation of the competitive bidding program and as new suppliers enroll in Medicare. CMS has previously announced that all existing DMEPOS suppliers will need to submit proof of accreditation by a deemed accreditation organization by September 30, 2009.⁵

MIPPA makes it a statutory requirement that all DMEPOS suppliers be accredited as meeting the DMEPOS quality standards in order to furnish DMEPOS items and services on or after October 1, 2009. Moreover, MIPPA extends the accreditation requirement to subcontractors who enter into arrangements with contract suppliers to assist in the furnishing of items and services under a competitive bidding contract; during the first round of competitive bidding, CMS had not required subcontractors to become accredited.⁶

MIPPA further amends the accreditation requirements as they apply to certain health care professionals (including orthotists and prosthetists as specified by the Secretary). Specifically, MIPPA provides that the accreditation requirements do not apply to such professionals unless the Secretary determines that the quality standards are designed specifically to be applied to such professionals. Likewise, the Secretary may exempt such professionals from the quality standards and accreditation requirement if the Secretary determines that licensing, accreditation, or other mandatory quality requirements apply to the professionals’ furnishing of DMEPOS items and services.

In light of the delay in bidding, CMS has announced the cancellation of the special accreditation deadlines previously established for the second round of bidding.⁷ All DMEPOS suppliers must nevertheless be accredited by September 30, 2009, whether or not they are furnishing services in a CBA.

3. Disclosure of Subcontracting Arrangements

MIPPA requires suppliers to disclose to the Secretary within 10 days of entering into a competitive bidding contract information regarding all subcontracting relationships the supplier has for furnishing items and services under the contract, including whether each subcontractor is accredited as applicable. Further, the supplier must notify the Secretary within 10 days of entering into any subsequent subcontracting arrangement.

4. Products Excluded from Competitive Bidding

MIPPA excludes from competitive bidding certain power wheelchairs and certain items furnished by physicians and hospitals. Specifically, MIPPA excludes from bidding:

(1)        Complex rehabilitative power wheelchairs classified as group 3 or higher, along with related accessories;

(2)        Certain off-the-shelf orthotics if furnished by physicians or other practitioners to their own patients as part of their professional service, or if furnished by a hospital to the hospital’s own patients during an admission or on the date of discharge.

(3)        DME and supplies furnished by a hospital to the hospital’s own patients during an admission or on the date of discharge, under certain circumstances.

5. Special Rule for Mail-Order Competition for Diabetic Testing Strips

CMS included mail-order diabetes supplies in the first round of competitive bidding, and indicated earlier this year that the agency intends to conduct nationwide competitive bidding for diabetes supplies in the future.

MIPPA provides that after the first round of bidding, a bidder seeking to furnish diabetes supplies must demonstrate to the Secretary that its bid covers a wide range of popular brands of diabetes supplies. That is, the bid must include 50 percent (or more as the Secretary may specify) of the types of diabetic testing strip products available (on an aggregate basis and taking into account volume for the different products). The HHS Office of Inspector General (“OIG”) is required to conduct a study by 2011 to identify the types of diabetic testing strip products by volume that could be used to determine whether this standard is met, and to update the report for subsequent rounds of bidding.

6. OIG Pricing Verification

The OIG is directed to conduct a post-award audit or survey to assess the process used by CMS to conduct competitive bidding and its method for determining pivotal bid amounts and single payment amounts in rounds one and two. The OIG may continue to verify such calculations for subsequent rounds of the program.

C. Changes to DMEPOS Fee Schedule Payments

MIPPA finances the delay in DMEPOS competitive bidding by reducing standard fee schedule payments by 9.5 percent nationwide for all items covered by round one bidding program (including related accessories if furnished with the competitively-bid item), beginning January 1, 2009. The law clarifies that the fee schedule reduction also applies to diabetic supplies, but only if furnished through mail order. Items that were not subject to competitive bidding will receive an inflation update for 2009 equal to the percentage increase in the consumer price index for all urban consumers (“CPI-U”) for the 12-month period ending with June 2008.

For 2010 through 2013, fee schedules will be increased annually to reflect the CPI-U increase (although in areas where competitive bidding is implemented, contract pricing will apply).

In 2014, the fee schedule for items not furnished in a CBA will again be updated for inflation. Additionally, the payment amounts for those items included in round one and subject to the 9.5 percent cut in 2009 will be increased by 2 percent, unless the Secretary has otherwise adjusted the rate for the item (under the Secretary’s authority to use payment information obtained through the competitive bidding program to adjust rates outside of a CBA), or if the item is being furnished in a CBA.

D. Other DMEPOS Bidding Provision

In addition to the provisions described above, MIPPA includes the following provisions modifying the DMEPOS competitive bidding program and related requirements:

Adjustments to Rates Outside of CBAs – The MMA authorized CMS to use payment information determined under competitive bidding to adjust fee schedule payments for items that are not in a CBA. CMS has not yet established a methodology for exercising this authority. MIPPA requires the Secretary to promulgate rules to specify the methodology to be used to make any such payment adjustment. The methodology must take into account the costs of items and services in areas in which such provisions would be applied compared to payment rates for those items and services in CBAs.
Competitive Acquisition Ombudsman – MIPPA requires the Secretary to establish a competitive acquisition ombudsman to respond to complaints and inquiries made by suppliers and individuals regarding the competitive acquisition program.
Negative Pressure Wound Therapy Codes – MIPPA directs the Secretary to evaluate the existing Health Care Common Procedure Coding System (“HCPCS”) codes for negative pressure wound therapy to ensure accurate reporting and billing for such items and services.
Report Deadlines and Scope – MIPPA modifies the deadline and scope of a mandated Government Accountability Office (“GAO”) report on the competitive bidding program, including requiring the GAO to examine, among other things: beneficiary access to DMEPOS resulting from awarding contracts to bidders without a physical presence in a CBA and who had no previous experience providing their contracted product category; beneficiary satisfaction; costs to suppliers participating in the program; the impact on small business suppliers; the impact on utilization of different items and services paid within the same HCPCS code; CMS administrative costs associated with the program; and the impact of the program on the provision of diabetic testing supplies. MIPPA also delays related mandated reports by the Program Advisory and Oversight Committee, the HHS Secretary, and the OIG.
Implementation Funding – MIPPA provides $20 million in funding for the DMEPOS bidding provisions in fiscal year (“FY”) 2008, and $25 million in each of FYs 2009 through 2012.

IV. CMS AND OIG IMPLEMENTATION GUIDANCE

The retroactive cancellation of round one DMEPOS bidding contracts and changes in supplier eligibility and pricing policy effective July 1, 2008 has prompted CMS to issue a number of brief updates to suppliers on MIPPA implementation issues.⁸CMS has confirmed that items that had been included in the first round of the competitive bidding program can be furnished by any enrolled DMEPOS supplier in accordance with existing Medicare rules. Medicare payment for these items will be made under the standard fee schedule, rather than at contract prices.

With regard to claims processing, CMS will begin processing all incoming claims under standard fee-for-service rules by July 28, 2008, and any claims that were held will be processed no later than August 4, 2008. To the extent possible, CMS will automatically reprocess claims that were paid under the bidding program and those claims whose denial was based solely on competitive bidding program rules. Nevertheless, there may be instances in which suppliers in CBAs will need to alert their contractor to claims that should be adjusted.

Moreover, the delay of competitive bidding retroactively increased beneficiary copayment amounts for DMEPOS items furnished for the brief period while the competitive bidding program was in effect. As a result, beneficiaries who already paid or were billed for cost-sharing amounts based on lower contract prices temporarily in effect since July I, 2008, are liable for additional cost-sharing amounts based on the higher fee schedule amounts. The OIG issued a policy statement⁹ on July 24, 2008 assuring suppliers and providers affected by retroactive increases in payment rates under MIPPA (including DMEPOS suppliers in the initial CBAs) that they will not be subject to OIG administrative sanctions¹⁰ if they waive retroactive beneficiary cost-sharing amounts attributable to those increased payment rates (subject to certain conditions). Note, however, that suppliers are not required to waive retroactive beneficiary liability, and they may instead choose to bill the beneficiary for the additional copayment obligation. CMS has confirmed that items that had been included in the first round of the competitive bidding program can be furnished by any enrolled DMEPOS supplier in accordance with existing Medicare rules. Medicare payment for these items will be made under the standard fee schedule, rather than at contract prices.

V. CONCLUSION

The MIPPA provisions delaying and reforming the DMEPOS competitive bidding program cap off a long and often frustrating period for suppliers in the initial competitive bidding areas. It can be hoped that CMS has learned from the numerous problems in the first round and will improve the mechanics of the bidding process, enhance the clarity of guidance offered to suppliers, and take other steps to prevent implementation of the program from adversely impacting beneficiary access to quality DMEPOS items in the bid areas.

* * * * *

Please contact our Senior Health Policy Analyst Debra A. McCurdy (703/641-4283, dmccurdy@reedsmith.com), Carol Loepere (202/414-9216, cloepere@reedsmith.com), Elizabeth Carder-Thompson (202/414-9213, ecarder@reedsmith.com), Robert J. Hill (202/414-9402, rhill@reedsmith.com), Kathleen McGuan (202/414-9278, kmcguan@reedsmith.com) or any other member of the Reed Smith health care group with whom you work if you would like additional information or if you have any questions.

The contents of this Memorandum are for informational purposes only and do not constitute legal advice.

¹ Pub. L. No. 110-275 (July 15, 2008). Additional details regarding the legislation are available on the House Ways and Means Committee web site.

² A Reed Smith client memo providing a detailed analysis of the final rule is available here.

³ For more details on round two, see the Reed Smith Client Memo posted here.

⁴ The text of the standards is available here.

⁵ For details, see here.

⁶ The first round bidding documents defined a subcontractor as “An entity, including an individual or individuals, that contracts with a supplier to supply a service either to the supplier or directly to the beneficiary, for which Medicare reimburses the supplier the cost of the service.”

⁷ The announcement is posted here. Prior to enactment of MIPPA, CMS had notified suppliers that they must have been accredited or have applied for accreditation by July 21, 2008 to be eligible to submit a bid for the second round and obtain accreditation by January 14, 2009 to be awarded a contract.

⁸ See here. Moreover, a brief notice informing Medicare beneficiaries of the delay in the bidding program is posted here.

⁹ See here.

¹⁰ Ordinarily, routine waivers of Medicare cost-sharing amounts could implicate the anti-kickback statute, the civil monetary penalty and exclusion laws related to kickbacks, and the civil monetary penalty law prohibiting inducements to beneficiaries.

Tags: Centers for Medicare and Medicaid (CMS), DMEPOS, H.R. 6331, Medicare & Medicaid, Medicare Improvements for Patients and Providers Act (MIPPA)

Posted on June 27, 2008 by Christine E. Bloomquist

Health Law Monitor

Articles in This Issue:

Provider Networks and Joint Ventures: Avoiding Antitrust Scrutiny Through Clinical Integration
Stark II, Phase III Final Rule
In the Spotlight: Fraud and Abuse
Health Law 101: Fraud and Abuse
Recent Reed Smith Publications

Click here to read the Spring 2008 issue of Health Law Monitor.

Tags: Anti-Kickback Statutes, Antitrust, Centers for Medicare and Medicaid (CMS), Fraud & Abuse, Health Care, Joint Ventures, Legislative Developments, Medicare & Medicaid, Regulatory Developments, Stark Law

Posted on May 30, 2008 by Catherine A. Durkin

Post-Market Surveillance: FDA's "Sentinel Initiative" and Related CMS Rulemaking

This post was written by Catherine A. Durkin and Areta L. Kupchyk.

On May 22, 2008, the Food and Drug Administration (“FDA”) announced plans for what it is calling the “Sentinel System”—a new, national electronic health information surveillance system to track the performance and safety of medical products once they are on the market. See FDA, “The Sentinel Initiative: National Strategy for Monitoring Medical Product Safety” (May 2008). In addition to a whitepaper on the Sentinel Initiative, FDA has published a “Questions and Answers” document, a fact sheet, and information for the consumer that are all available at fda.gov.

The same day, the Centers for Medicare & Medicaid Services (“CMS”) announced a final rule allowing it to share prescription drug claims data for the 25 million Medicare Part D enrollees with other government agencies, as well as with “researchers.” Under the rule, shared data will be available for any purpose “deemed necessary and appropriate by the Secretary,” such as analysis, reporting, and public-health purposes, among other things. See 73 Fed. Reg. 30664 (May 28, 2008); CMS Fact Sheet “Medicare Part D Data Regulation” (CMS-4119-F) (May 22, 2008). The rule becomes effective June 27, 2008.

These coinciding initiatives by the two major federal health regulatory agencies are intended to improve health care quality by using information technology and data mining in new ways. However, numerous policy and strategy questions are still up for debate.

The current system for monitoring drug and device adverse events relies on health professionals and patients to: (1) recognize a potential link between an adverse event and a product; and (2) voluntarily report it, either to the manufacturer or to FDA. In recent years, controversies surrounding certain drug safety issues have contributed to criticisms by members of the public and Congress that the current system is often inadequate. To ensure that FDA would improve its current safety monitoring system, Congress passed legislation in September 2007, the Food and Drug Administration Amendments Act of 2007 (“FDAAA”), Pub. L. No. 110-85 § 905, that required FDA to obtain access to data sources, develop a system to link and analyze product safety data available through these sources, and, using these tools, establish an “active adverse event surveillance” program. The Sentinel System, as its name suggests, is intended to accomplish these goals.

As proposed, the Sentinel System would provide FDA with access to a broad range of publicly and privately maintained health data sources so that FDA could search these sources and gather intelligence on potential safety risks associated with drugs or medical devices as trends emerge. See U.S. Department of Health & Human Services, News Release, New Efforts to Help Improve Medical Products for Patient Safety and Quality of Medical Care (May 22, 2008). Through targeted queries of health information databases (such as the Medicare Part D and other claims databases), FDA claims it would be able to obtain de-identified patient data, perform analyses, and draw conclusions regarding product safety in order to improve the overall quality of medical care. FDA also states that the system would be designed to comply with appropriate security and privacy standards.

The notion that health information technology initiatives (such as electronic health records, e-prescribing, etc.) are the key to improving the quality and reducing the costs of our health care system is a major reason Congress mandated FDA’s expansion of post-approval drug and device surveillance. Although FDA has recognized various efforts (in both the public and private sectors) to collect and make use of electronic safety, performance, and other health/patient data, as listed in the Attachment to FDA’s whitepaper on the Sentinel Initiative entitled “Related Federal/Private Sector Activities,” to date, such efforts have not been coordinated or standardized. The Sentinel Initiative ultimately intends to incorporate these efforts on a national level.

Proposed Mechanics of the Sentinel System

Although FDA is still in the early stages of developing the Sentinel System and specific details are scarce, FDA proposes, at least initially, to capitalize on existing data systems, such as medical claims databases and electronic health record systems, through a “public-private partnership” rather than by creating a new, centralized database. Data sources would continue to be owned and maintained by their current owners. Data owners would either be members of the partnership, or contract with FDA and/or the partnership to provide data. The partnership would be subject to a “defined governance process” and structured according to an “established organizational framework,” both still to be determined. Aside from the Medicare Part D claims database, potential public data sources include Medicare Parts A and B, the Veterans Health Administration, the Department of Defense, and CDC’s National Electronic Injury Surveillance System (“NEISS”).

The multiple data sources would somehow be linked with one another so that they would be interoperable and part of an overall, to-be-developed “information technology architecture.” FDA would thus be able to send queries to a variety of data sources and obtain results quickly, which would be stripped of identifiers to comply with any applicable privacy and security laws and/or standards that protect personal and proprietary information. FDA would then be able to review and analyze the data, observe trends, draw conclusions regarding product safety and performance, and take appropriate measures to address concerns. Accordingly, the system is intended to provide FDA with a stronger, more proactive product safety surveillance capability. The system may also serve as a tool for many other types of research performed by other public health agencies and health researchers; for example, evaluating specific treatment outcomes, or assessing utilization trends.

Open Issues and Next Steps

Based on input from the public during a two-day public workshop FDA held in March 2007 and comment period in early 2007 (see 72 Fed. Reg. 2284 (Jan. 18, 2007)), FDA has identified the following as key issues that must be resolved prior to implementing the Sentinel System:

How will private and/or proprietary information be protected?
Who will have access to the system?
How will the initiative be funded?
What about the quality of the data, standards, and system interoperability? How will these be improved?
How will risks and adverse events be identified through data analysis?
How will a pilot for the system be developed and validated?

Although FDA has touched upon some of these issues in its whitepaper and related publications, and has raised numerous others (for example, the scientific credibility of the data analysis and the integrity and independence of the system’s management/governance structure), they remain largely unanswered. The next phase of the Sentinel Initiative will incorporate a series of discussions on the “scientific and policy issues that must be addressed.”

Further, FDA plans to begin meeting with potential partners to formalize specific action items necessary to establish the Sentinel System.

According to the CMS fact sheet on the final Part D claims data rule, CMS will hold an open door forum in June 2008 to review the new rule and discuss the claims data release process, as well as to answer questions from the public. Once this open door forum is scheduled, information will be posted here. If you would like information on how to participate in this open door forum, please contact Katie Durkin at cdurkin@reedsmith.com.

Tags: Adverse Events, Centers for Medicare and Medicaid (CMS), Food and Drug Administration (FDA), HIPAA, Medicare Part D Drugs, Post-Market Surveillance, Product Liability, Product Recalls, Regulatory Developments, Sentinel

Posted on May 30, 2008 by Karl A. Thallner

Proposed Stark Law Changes in CMS's 2009 IPPS Proposed Rule

This post was written by Karl A. Thallner, Jr., Gina M. Cavalier, Daniel A. Cody, Heather M. Zimmerman, and Suzanne K. Yurk.

I. INTRODUCTION

On April 30, 2008, the Centers for Medicare & Medicaid Services (“CMS”) published a proposed rule to implement the Fiscal Year 2009 Hospital Inpatient Prospective Payment System (the “IPPS proposed rule”). 73 Fed. Reg. 23528. The IPPS proposed rule includes possible changes to certain provisions of the federal Physician Self-Referral Law, or “Stark Law,” regulations. Under the Stark Law, if a physician or a member of a physician’s immediate family has a financial relationship with an entity, the physician may not make referrals to that entity for the furnishing of certain “designated health services” (“DHS”) under Medicare, unless an exception applies. A DHS entity is prohibited from seeking or keeping payment for services furnished as a result of a prohibited referral. The IPPS proposed rule’s changes to the Stark Law regulations come on the heels of two other significant Stark Law regulatory developments – the July 2007 proposed Stark Law changes contained in the proposed 2008 Medicare Physician Fee Schedule (“2008 proposed MPFS”) regulations and the September 2007 final Phase III Stark Law regulations¹. CMS will accept comments from the public on these proposed regulations until June 13, 2008.

As discussed below, the proposed changes in the IPPS proposed rule could significantly affect Stark Law compliance for physicians and entities that have financial relationships with physicians. The key proposals involving the Stark Law regulations would: address when a physician is deemed to “stand in the shoes” of a physician organization and when an entity furnishing DHS is deemed to “stand in the shoes” of another entity that it owns or controls; establish the time periods during which referrals are prohibited and claims for services pursuant to such referrals are disallowed following certain types of Stark Law violations; supplement existing regulations involving disclosure to patients of physician ownership of hospitals and lack of 24/7 physician presence at hospitals; and provide for mandatory reporting by hospitals to CMS of financial relationships with physicians. Additionally, CMS solicited comments on other Stark Law-related topics, including the possibility of a new exception for hospital-physician “gainsharing,” and the regulation under the Stark Law of physician-owned device or implant companies.

Because several of the proposals would involve a new, fundamentally different and more complex analytical approach to the Stark Law, and other provisions would require comprehensive reporting of physician financial relationships, we believe that these provisions, if implemented, could have a significant impact on certain health care providers. In particular, the “stand in the shoes” or “SITS” provisions, whereby a physician or entity would be deemed to have a financial relationship that, in fact, it does not have, may increase the complexity, uncertainty and burden of Stark Law compliance. Additionally, CMS’s new interpretations and proposals reinforce that harsh penalties may result from mere technical violations of the Stark Law. Finally, the proposed new comprehensive reporting obligations for hospitals will likely be significantly more costly and burdensome than CMS projects. Although it is possible that CMS will not ultimately implement all of these proposed changes², because of the magnitude of the consequences that could befall some health industry participants if CMS does adopt these proposed provisions, they warrant careful consideration. Indeed, for some providers, the potential compliance problems raised by these proposed regulations will be so significant that they may want to submit formal comments to CMS.

This memorandum describes the key provisions of the IPPS proposed rule and provides our commentary on aspects of the proposals that we expect to be of greatest interest to our clients.

II. STARK LAW PROVISIONS IN THE IPPS PROPOSED RULE

A. “Stand in the Shoes” Provisions

1. Physician “Stand in the Shoes” Provisions

a. Background

The Stark Law prohibits referrals where a physician has not only a direct, but also an indirect, financial relationship (whether an ownership or investment interest or a compensation arrangement) with a DHS entity, unless an exception applies. Most of the Stark Law’s exceptions for compensation arrangements are applicable only where the physician has a direct relationship with the DHS entity. Therefore, in the Phase I regulations under the Stark Law published in 2001, CMS developed an analytical approach for addressing indirect compensation arrangements. First, it established a three-part test to determine whether an indirect compensation arrangement exists; if an indirect compensation arrangement is not found to exist because of the application of the test, the Stark Law referral prohibition would be inapplicable. Specifically, under that test, an indirect compensation arrangement exists only if there is an unbroken chain of financial relationships between the DHS entity and the referring physician; the aggregate compensation to the referring physician (from the entity in the chain closest to the physician) varies with or takes into account in any manner the volume or value of referrals to, or other business generated for, the DHS entity; and the DHS entity knows or should know that the referring physician receives such compensation. Second, CMS created an indirect compensation arrangements exception; that exception applies if, among other things, the compensation is fair market value for services and items actually provided, and is not determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician for the entity furnishing DHS. This method of analysis, therefore, focused on whether the individual referring physician has an inappropriate financial interest in referring to the DHS entity.

With the Phase III regulations, CMS articulated its concern that this method of analysis for indirect compensation arrangements creates an “unintended loophole” that results “in determinations that arrangements that involve financial incentives for referring physicians fall outside the ambit of the [Stark Law].” As a result, in Phase III, CMS adopted the physician “stand in the shoes,” or “SITS” concept, whereby a physician is deemed to “stand in the shoes” of his or her physician organization. The consequence of this approach is that, unlike the prior indirect compensation arrangement approach, a compensation arrangement between the physician organization and the DHS entity would have to meet the requirements of a direct compensation exception in order for the physician to refer to the DHS entity. The fact that the relationship between the physicians and the physician organization might not create any financial incentive for the physician to refer to the DHS entity would no longer be relevant.

After publishing the Phase III regulations, CMS received informal feedback concerning the application of the SITS rule to academic medical centers³ and nonprofit integrated health care systems, where support payments among the components of such systems are common. Often, these entities relied on the indirect compensation arrangement analysis to allow physician referrals from faculty physicians. As a result of the feedback, in November 2007, CMS announced that, in order to provide more time to evaluate any unintended impact of the SITS rule, it would delay for one year implementation of the physician SITS rule for academic medical centers and nonprofit integrated health care systems.

The IPPS proposed rule reflects CMS’s continuing efforts to understand and attempt to address these and other concerns with the physician SITS rule. CMS sets forth two alternative proposals to modify the Phase III physician SITS concept. The first approach, the “Multi-Faceted Approach”, would reformulate and limit the physician SITS analysis. The second approach proposes to leave the Phase III SITS analysis in place, but to create a new exception or exceptions to prevent the overly broad application of the SITS doctrine.

b. Alternative 1: Multi-Faceted Approach

As one alternative, CMS has proposed a comprehensive approach to modify the physician SITS provisions. Under this alternative, a physician would not “stand in the shoes” of his or her physician organization if the compensation arrangement between the physician and the physician organization satisfies one of the exceptions for bona fide employment arrangements, personal services arrangements or fair market value compensation. Each of these exceptions requires, among other things, that the compensation to the physician be consistent with fair market value and not determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals by the physician to the physician organization. Where the physician does not stand in the shoes of the physician organization by reason of the application of one of these exceptions, the indirect compensation analysis, discussed above, would be applied to determine whether the Stark Law would prohibit referrals from the physician to a DHS entity having a financial relationship with the physician organization.

Where the physician’s compensation arrangement with his or her physician organization does not meet one of these exceptions, the physician is deemed to stand in the shoes of the physician organization, and the physician organization’s arrangement with the DHS entity would have to satisfy a direct compensation arrangements exception. Thus, for example, if an employed physician leases space or equipment to his physician organization, the physician would apparently stand in the shoes of the physician organization, even if the lease satisfied the requirements of an applicable Stark Law exception. Additionally, and even more significantly, a physician who relies on the “in-office ancillary services” exception to permit the physician’s referrals to his or her physician organization would be deemed to stand in the shoes of the physician organization for purposes of any referrals to a DHS entity with which the physician organization has a financial relationship. CMS claims that, because the in-office ancillary exception does not require fair market value compensation to physicians, compensation from a DHS entity to a physician organization relying on that exception could be channeled to physicians for referrals to the DHS entity.

The multi-faceted proposal also includes a clarification that the physician SITS concept would not apply where the physician’s referrals are protected under the academic medical center exception (the “AMC exception”). If the AMC exception is not satisfied, the same SITS rules discussed above would apply to a physician organization that is part of an academic medical center. In addition, CMS is proposing that the physician SITS rule will not apply where a component of an academic medical center has a written agreement with a physician organization to satisfy the academic medical center’s obligations under the Medicare graduate medical education rules, such as where a teaching hospital has an agreement with a community physician group to serve as a teaching site.

Despite CMS’s proposal for a more relaxed SITS approach, CMS has expressed concern that some parties might be applying the indirect compensation arrangements improperly. Specifically, CMS believes that, even where compensation to a physician is on a fixed periodic basis, it may nevertheless vary with or take into account the volume or value of referrals to or business generated for DHS entities. This concern undoubtedly sparked CMS’s broad physician SITS rule and is causing CMS’s reluctance to relax the SITS concept even more. Further, CMS indicated that it may provide additional guidance on the application of the three elements of the definition of indirect compensation arrangement.

c. Alternative 2: Exceptions to SITS

CMS’s second alternative to addressing the physician SITS concept would not revise the existing SITS regulatory provisions, but would establish specific exceptions to the SITS provisions to protect non-abusive arrangements not covered by other Stark Law exceptions. One specific exception that CMS is considering would cover “mission support” payments (or similar compensation arrangements) between DHS entities and physician organizations and physicians. CMS is soliciting comments on this proposal, including such aspects as whether an exception should be limited to “mission support” or whether it should also cover other specific types of payments or compensation arrangements, the types of parties that should be permitted to use the exception, and the conditions that should apply to such an exception.

CMS stated that this exception might address compensation arrangements between components of an “integrated delivery system,” perhaps containing conditions similar to the AMC exception. CMS expressed concern that the term “integrated delivery system” is used to describe a wide variety of systems with varying degrees of actual integration, and is therefore soliciting comments on defining a “fully integrated health care delivery system,” what types of compensation arrangements should be protected, and what conditions should be included in an exception. Based on feedback from industry stakeholders, CMS stated that an integrated delivery system could be defined as a system comprised of two or more entities that are related and substantially integrated by common ownership or control. CMS noted, among other things, that it would be necessary to develop definitions of “ownership” and “control,” and solicited comments on these issues, other aspects and conditions to an integrated delivery system exception, and alternative approaches.

d. Reed Smith Commentary

The Multi-Faceted Approach likely would enable more physician arrangements to avoid the application of the physician SITS rule than would the Exceptions alternative. For that reason, it is likely to be the more desirable of the two alternatives for many. Both alternatives are limited, however, and would require the continued application of the physician SITS rule in many circumstances.

For example, under either approach, a physician relying on the in-office ancillary services exception for referrals to his physician organization (a very common situation) would still stand in the shoes of his physician organization for purposes of referrals to a hospital with which the physician organization has a contract. This would require the physician organization-hospital contract to meet a direct compensation exception. While CMS explains that this is to ensure that the physicians do not receive compensation for their referrals to the hospital, even without the physician SITS rule, under the indirect compensation arrangements analysis, Stark Law compliance would prohibit the referring physician from receiving compensation that is determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician for the hospital. Thus, if CMS’s principal concern is that some parties are misapplying the indirect compensation analysis, a simpler and less disruptive approach would have been to clarify the indirect compensation analysis rather than to pursue the complexity of the physician SITS rules. Further, CMS’s application of the physician SITS approach arguably expands the Stark Law beyond its original intent to proscribe referrals from individual physicians who have a financial incentive to refer.

2. Entity “Stand in the Shoes” Provisions

a. Summary

In the 2008 proposed MPFS, CMS proposed a new Stark Law regulatory concept whereby a DHS entity should “stand in the shoes” of an entity that it owns or controls. Under this entity SITS proposal, the DHS entity would be deemed to have the same compensation arrangements with the same parties and on the same terms as does the entity that it owns or controls. Thus, a compensation arrangement between the owned or controlled entity and the physician would have to satisfy a direct compensation arrangement, rather than be evaluated under the indirect compensation analysis discussed above. CMS gave the example of a hospital that owns or controls a medical foundation that contracts with a physician to provide physician services to a medical foundation clinic; in such a case, CMS said that the hospital would stand in the shoes of the medical foundation and would be deemed to have a direct compensation relationship with the contractor physician.

CMS did not finalize the entity SITS proposal in the final Medicare Physician Fee Schedule regulations, but has re-proposed a more limited entity SITS approach in the IPPS proposed rule. CMS claims that an entity SITS rule, in combination with the physician SITS rule, would simplify the Stark Law analysis and reduce program abuse. Specifically, CMS is proposing that a DHS entity would be deemed to stand in the shoes of an organization in which it has a 100 percent ownership interest. This proposal is narrower than the MPFS proposal, in that it would not apply the entity SITS concept to entities in a control-but-not-ownership relationship, such as a nonprofit corporation whose sole member is a DHS entity. Yet, this rule is broader than the MPFS proposal because it would apply whether or not the wholly owned entity is itself a DHS entity. In connection with this proposal, CMS is soliciting comments as to whether the SITS approach should be applied to a DHS entity that owns less than 100 percent of another entity, and to a DHS entity that controls another entity (by having the power, directly or indirectly, significantly to influence or direct the actions or policies of the organization).

b. Reed Smith Commentary

The entity SITS proposal, if adopted, would also complicate the Stark Law analysis for some indirect compensation arrangements, particularly if CMS extends this concept to entities that are not wholly owned by a DHS entity. In that connection, any definition of “control” adopted by CMS will likely not produce bright lines, and the analytical approach to Stark Law compliance could be uncertain in some cases. Yet, if the proposal is adopted as proposed, it would result in substantially differing Stark Law analyses for nonprofit health systems (to which the entity SITS rule would not apply) as compared with profit health systems (to which it would often apply). It would seem hard to justify this disparate treatment on that basis.

3. Conventions for Application of “Stand in the Shoes” Provisions

a. Summary

The need to apply both the physician SITS rule and an entity SITS rule to a chain of financial relationships could, in some cases, lead to anomalous or inconsistent results. Therefore, CMS has proposed a set of “conventions” describing how the two SITS concepts would work together. These conventions would ensure that at least one compensation arrangement remains between the DHS entity and the referring physician, which would then be tested for compliance with a direct exception. The conventions call for the two rules to be applied as follows:

If the physician SITS rule applies, the physician SITS provisions would be applied first, resulting in the physician “standing in the shoes” of his or her physician organization.
However, if applying the physician SITS provisions would result in only one financial relationship remaining between the DHS entity and the “collapsed” physician/physician organization, and that relationship is an ownership interest, the physician SITS provisions would not be applied, and the entity SITS provisions instead would be applied first.
If, after first “collapsing” the physician and the physician organization by applying the physician SITS rule, at least two links remain in the chain of financial relationships between the physician who is standing in the shoes of his or her physician organization and the DHS entity, the next step would be to apply the entity SITS provisions.

CMS provides a series of examples that illustrate the application of these conventions. First, if a chain of financial relationship runs hospital → wholly owned home health agency → group practice → physician owner, the physician SITS rule would be applied first, resulting in the physician standing in the shoes of the group practice. Then the entity SITS rule would be applied so that the hospital stands in the shoes of the home health agency. If the remaining financial relationship between the home health agency and the group practice is a compensation arrangement, it would be deemed to be a direct compensation arrangement between the hospital and the physician, and would have to satisfy a direct Stark Law exception in order for the physician to refer to the hospital.

A second example involved the following chain of financial relationships: hospital → group practice wholly owned by the hospital → employed physician (with a compensation arrangement that does not satisfy the bona fide employment exception). CMS says that, if the only financial relationship between the hospital and the group practice is the ownership interest, the physician SITS rule would not be applied first because of the second convention. Rather, the entity SITS provision would be applied to cause the hospital to stand in the shoes of the group practice, and the remaining financial relationship would be a direct compensation arrangement between the hospital and the employed physician. In this case, CMS notes that no direct compensation arrangement exception would be available because the physician’s employment would not have satisfied the bona fide employment exception.

CMS’s third example uses the same chain of financial relationships as the second, but the group practice would have an office space rental agreement with the group practice (in addition to owning the group practice). CMS concludes that the existence of the compensation arrangement between the hospital and the group practice would preclude application of the second convention, and that therefore the physician would stand in the shoes of the group practice. The rental agreement then would have to meet the requirements of a direct Stark Law exception.

b. Reed Smith Commentary

The necessity for conventions of the sort discussed by CMS illustrates, perhaps more than anything else, the complex analysis of indirect financial relationships that will become necessary as a result of the application of the SITS rules. The analysis will be all the more difficult because relationships among participants in the health care industry are not static; as illustrated by the second and third examples above, the fundamental approach to Stark compliance could change simply by the addition of another agreement between two parties in a chain of financial relationships. For hospitals and other entities with possibly hundreds of direct and indirect financial relationships with physicians, the compliance burden will be tremendous.

Furthermore, the application of these rules will be highly technical and the results will not be intuitive. For example, it is hard to understand why referrals to the hospital from the physician in the second example would be prohibited, but those same referrals would be permitted under the third example, simply because the hospital also has an office lease arrangement with the group practice that meets the office lease arrangements exception.

4. PCs Wholly Owned by Physicians

In the Phase II regulations, recognizing that some physicians (even those who are employed by group practices) practice through a wholly-owned professional corporation, CMS established the rule that a physician is deemed to stand in the shoes of his or her wholly owned PC. In the IPPS proposed rule, CMS expressed concern that, with the development of the physician SITS provisions in Phase III, some parties may not apply the Phase II policy concerning wholly owned PCs. Specifically, CMS indicates that some parties, in applying the definition of “physician organization” from Phase III, might deem a physician to stand in the shoes of his or her wholly owned PC, but not further collapsing the physician/PC with the physician organization. CMS is therefore proposing revisions to clarify that a physician and wholly owned PC are always treated the same under the Stark Law, and that a physician who stands in the shoes of his or her wholly owned PC also stands in the shoes of his or her physician organization.

B. Period of Disallowance

1. Background

With this proposal, CMS seeks to address the time period (referred to as the “period of disallowance”) during which a physician would be prohibited from referring patients to a DHS entity and for which the DHS entity would be prohibited from billing Medicare if a financial relationship between the referring physician and the DHS entity failed to satisfy a Stark Law exception. Generally, CMS has stated that the Stark Law contemplates that the period of disallowance begins when the financial relationship failed to comply with the Stark Law, and ends when the arrangement came into compliance. Yet, CMS observes, in some cases if may not be clear when a financial relationship has ended. For example, if a DHS entity leases space to a physician for substantially less than fair market value, there may be an inference that the below-market rent was in exchange for future referrals, including those made long after the lease expired.

In the 2008 proposed MPFS, CMS solicited comments on this issue, but received few responses. In the IPPS proposed rule, CMS proposes to establish an outside period of disallowance in the following three circumstances:

If the reason for noncompliance is not related to compensation, the period of disallowance would begin on the date the arrangement first was out of compliance and end no later than the date the arrangement was brought into compliance. For example, if a signature is missing or an agreement is not in writing as required by the applicable exception, the period of disallowance would continue until no later than the date that the missing signature is obtained or a written agreement is executed. CMS notes that it is possible that the financial arrangement might end prior to the arrangement being brought into compliance, and in such circumstances, the period of disallowance would be made on a case-by-case basis.
If the reason for noncompliance is related to the payment or receipt of excess compensation, the period of disallowance would begin on the date the arrangement first was out of compliance and end no later than the date the excess compensation (including interest, as appropriate) was returned by the party receiving it to the party that provided it and all other requirements of the applicable exception are met. For example, if on Feb. 1 a hospital provided nonmonetary compensation to a physician in excess by $100 of the annual regulatory limit, and noncompliance was not discovered until Oct. 1, the period of disallowance would begin Feb. 1 and end no later than the date on which the physician returned the excess nonmonetary compensation (or its value). (CMS notes that, if the noncompliance was discovered and the excess returned within 180 days of its receipt, existing regulations permit the parties to maintain compliance.)
If the reason for noncompliance is related to the payment or receipt of insufficient compensation, the period of disallowance would begin on the date the arrangement first was out of compliance and end no later than the date the shortfall was paid to the party to which it is owed, and all other requirements of the applicable exception are met. CMS provides an example of a hospital and physician that entered into a two-year office space rental agreement that provides for a CPI rent adjustment after the first year, but the physician continued to pay the same rate during the second year until noncompliance was discovered in the middle of the second year. CMS stated that the period of disallowance would run from the first day of the second year of the lease until no later than the date on which noncompliance was discovered, as long as the physician paid the hospital rent shortfall on that date, paid the CPI adjusted rate for the remainder of the term, and the arrangement otherwise satisfied the requirements of the space lease arrangements exception.

CMS is not proposing a prescribed period of disallowance for arrangements that are noncompliant for reasons other than those specified above. For example, the periods of disallowance specified above are inapplicable to a compensation arrangement that fails to meet an exception because the compensation takes into account the volume or value of referrals in violation of an applicable exception, and to a noncompliance arrangement that ends before it is brought into compliance. With respect to these and all other instances of noncompliance not covered by the three circumstances described above, the period of disallowance will depend on the facts and circumstances.

2. Reed Smith Commentary

While CMS’s proposal attempts to provide some degree of certainty as to the period of disallowance under some circumstances, it leaves this question unaddressed for a great many circumstances, such as where an arrangement was noncompliant for reasons other than those specified in the three scenarios identified. The best that CMS can say about such circumstances is that the period of disallowance will be made on a case-by-case basis considering the facts and circumstances, but CMS provides no guidance as to what facts or circumstances would bear on the period of disallowance. This will leave open in many cases the question of whether a physician with a noncompliant arrangement could ever again refer to the DHS entity without violating the Stark Law. Furthermore, in discussing the three scenarios identified, CMS implied that even the most trivial deficiencies in arrangements with referring physicians cannot be corrected and therefore would cause referrals from physicians to violate the Stark Law.

C. Gainsharing Arrangements

1. Background

The term “gainsharing” refers to a variety of arrangements by which hospitals encourage physicians to practice more efficiently in the hospital by sharing some portion (typically measured by a percentage) of the hospital’s cost savings attributable to changes in physician behavior. The Office of Inspector General (“OIG”) had expressed significant concern that gainsharing arrangements could violate civil monetary penalty laws prohibiting hospitals from paying physicians to induce them to limit or reduce items or services furnished to Medicare or Medicare beneficiaries, and could violate the Anti-Kickback Statute if one purpose of the gainsharing arrangement is to influence referrals for federal health program reimbursable business. Nevertheless, in recent years, the OIG has issued favorable advisory opinions protecting from sanction under these laws specific gainsharing arrangements that include various safeguards. Further, in its March 2005 “Report to Congress on Physician-Owned Specialty Hospitals,” the Medicare Payment Advisory Committee recommended allowing certain gainsharing arrangements between physicians and hospitals, and CMS has initiated certain gainsharing demonstration projects, some of which have been mandated by Congress. Yet, whether and how such gainsharing arrangements could comply with the Stark Law has remained uncertain, particularly in view of CMS’s concern about percentage compensation arrangements generally. In view of these developments, in the IPPS proposed rule, CMS is soliciting comments as to whether a specific exception for gainsharing arrangements should be developed, what types of requirements and safeguards should be included in the exception, and whether certain services, clinical protocols or other arrangements should not qualify for the exception.

2. Reed Smith Commentary

While the Stark Law compliance of gainsharing arrangements of the type approved by the OIG has been uncertain, one approach to compliance for many such arrangements may have been application of the indirect compensation analysis. With the physician and entity SITS rules, this analysis may be unavailable. As a result, the development of an appropriate Stark Law exception for gainsharing arrangements could be valuable to many hospitals and physicians. CMS has not set forth a particular proposal with respect to such an exception. Hopefully, if CMS develops a gainsharing exception, it will include only requirements consistent with those considered necessary for compliance with the civil monetary penalty laws and Anti-Kickback Statute.

D. Physician-Owned Implant and Medical Device Companies

1. Background

In the 2008 proposed MPFS, CMS proposed to change the definition of “entity” to include entities that, although not themselves submitting claims for DHS, furnish DHS to a DHS entity. Although the scope of this new concept was uncertain, and the proposal has not been finalized, the proposal could have been interpreted to expand the Stark Law to cover a physician’s ownership of a medical device manufacturer, distributor or group purchasing organization (a “POC”) that furnishes medical devices to hospitals to which the physician refers. In response, CMS received several comments seeking clarification.

In the IPPS proposed rule, CMS states that the Stark Law and existing regulations, including the indirect compensation arrangements analysis discussed above, address many arrangements between the physician and these in soliciting POCs. However, CMS is soliciting comments as to whether specific provisions should be developed to address POCs and similar physician-owned entities. In particular, CMS solicits comments as to whether, and to what degree, physician investment in POCs is detrimental to federal health programs and their beneficiaries, and whether the Stark rules should address POCs more specifically or whether existing fraud and abuse laws adequately address the issues they raise.

2. Reed Smith Commentary

It is not clear how serious CMS is about addressing physician ownership of medical device companies through Stark Law regulation. Certainly, this could reflect a substantial expansion of the Stark Law to cover entities that themselves do not directly provide designated health services, and could also create a precedent for even further expansion of the Stark Law. Without specific proposed regulatory provisions, however, it is not possible to determine the potential impact on any particular physician or medical device company.

E. Physician and Hospital Disclosure and Reporting

The IPPS proposed rule contains new proposals relating to required hospital and physician disclosures to patients of physician ownership and availability at a hospital, and required hospital reporting of financial relationships with physicians.

1. Hospital and Physician Disclosures to Patients

a. Summary

In last year’s IPPS final rule, CMS adopted requirements that each physician-owned hospital provide written notice to patients that the hospital is physician-owned and that a list of the hospital’s physician owners or investors is available upon request, and that any hospital that does not have a physician present in the hospital 24 hours per day, 7 days per week, provide written notice to patients of this fact and indicate how the hospital will meet the medical needs of any patient who develops an emergency medical condition when no physician is present. In the IPPS proposed rule, CMS is proposing several clarifications and additional provisions relating to these requirements, including:

Expanding the requirements relating to physician-owned hospitals to apply also when an immediate family member of a physician holds an ownership or investment interest in the hospital.
Creating an exception to the requirements relating to physician-owned hospitals where none of the physician owners refers patients to the hospital if the hospital attests to this fact in writing.
Clarifying that the list of physician owners and investors must be furnished at the time that the patient or someone on the patient’s behalf requests it.
Adding a requirement that physician-owned hospitals must require all physicians who are members of the hospital’s medical staff to agree, as a condition of continued medical staff membership or admitting privileges, to disclose in writing to all patients who they refer to the hospital, any ownership or investment interest in the hospital held by themselves or by an immediate family member.
Permitting CMS to terminate the Medicare provider agreement of any hospital that fails to comply with the physician ownership disclosure requirements or the 24/7 physician presence disclosure requirements.

b. Reed Smith Commentary

The proposal with the most practical significance for hospitals with physician ownership is the requirement to condition medical staff membership and clinical privileges on physician disclosure to patients. Currently, most state medical licensing acts or regulations already require physician disclosure to patients of ownership in health care facilities to which they refer. In the preamble to the IPPS proposed rule, CMS fails to explain why such state laws are insufficient to accomplish the required disclosure. If adopted, a hospital with physician ownership will need to consider how it would implement the new requirement, such as through agreements with the physician owners or provisions in the hospital’s medical staff bylaws, rules or regulations, and the implications of these alternative approaches on such things as medical staff due process rights. Furthermore, the addition of this requirement could imply some obligation on the part of the hospital to enforce physician disclosure to patients.

2. Hospital Reporting of Financial Relationships with Physicians

a. Summary

The Stark Law requires DHS entities to provide the Secretary of the Department of Health and Human Services with information concerning the entities’ ownership, investment and compensation arrangements in such form and at such times at the Secretary specifies. Currently, Stark Law regulations require entities to make such information available only upon request. In connection with the requirements of the Deficit Reduction Act of 2005 for the Secretary to address issues relating to physician-owned specialty hospitals, CMS sent a voluntary survey to 130 specialty hospitals and 220 competitor hospitals seeking certain information about their physician relationships, and included in its Report to Congress a statement that CMS would require all hospitals to provide this information on a periodic basis.

Thereafter, CMS prepared a collection instrument, called the “Disclosure of Financial Relationships Report” or “DFRR,” which it intended to send to 500 hospitals to determine their compliance with the Stark Law and to assist in developing future regulations. Although CMS initially intended to go forward with mandatory DFRR reporting for the 500 hospitals, in the IPPS proposed rule, CMS indicates that it seeks further comments prior to proceeding with this initiative. Attached to the IPPS proposed rule is the DFRR collection instrument, which requires, among other things, completion of worksheets listing all of the hospital’s direct and indirect physician ownership or investment relationships; a listing of its rental, personal services and recruitment arrangements; and certain information relating to other types of compensation arrangements. It is unclear from the preamble to the IPPS proposed rule, the instructions to the DFRR, or the forms themselves whether the required information extends to indirect compensation arrangements with physicians.

In the IPPS proposed rule, CMS is proposing and soliciting comments relating to various aspects of the DFRR initiative, including:

Soliciting input as to whether CMS’s estimates of the time and cost burden to complete the DFRR (an average of 31 hours and cost of $1,550 per hospital) are accurate.
Proposing that the DFRR be completed and filed with CMS within 60 days after the date appearing on CMS’s transmittal letter or email, but indicating a hospital may, upon good cause, receive an extension of time so as to avoid the imposition of civil monetary penalties.
Soliciting comments as to whether the DFRR collection effort should be recurring and, if so, on what periodic basis, whether CMS is collecting too much or not enough information, whether the DFRR should be directed to all hospitals and, if so, on what kind of collection cycle.
Soliciting comment on whether hospitals that receive the DFRR should have to provide yearly updates and report only changed information.

b. Reed Smith Commentary

We expect that CMS is significantly underestimating the burden on hospitals in completing the DFRR collection instrument, particularly if data concerning indirect compensation arrangements will have to be furnished. While most hospitals have some method of cataloging the majority of written agreements directly with physicians or physician groups, it is likely that many hospitals do not have processes and procedures in place to collect data concerning indirect compensation arrangements. Moreover, since CMS candidly states that the collected information may be used to determine whether the hospitals submitting the data are in compliance with the Stark Law (and therefore, by implication, for possible enforcement action), hospitals receiving the DFRR may decide to re-evaluate some or all disclosed arrangements for Stark Law compliance. This could be time consuming and costly, particularly because older agreements may have been analyzed under regulations and guidance available at the time, rather than under more current Stark Law regulations and guidance.

III. CONCLUSION

Given the magnitude of the potential negative consequences to providers that may result if the IPPS proposed rule were to be enacted, hospitals and other health care providers may wish to consider submitting a formal comment letter to CMS in response to the proposed changes, or asking that such a submission be made by a trade association of which they are members. Such comments are due by June 13, 2008.

* * * * *

Please contact Karl A. Thallner, Jr. (215.851.8171, kthallner@reedsmith.com), Gina M. Cavalier (202.414.9288, gcavalier@reedsmith.com); Daniel A. Cody (415.659.5909, dcody@reedsmith.com); Heather M. Zimmerman (202.414.9341, hzimmerman@reedsmith.com); Suzanne K. Yurk (215.241.5470, syurk@reedsmith.com) or any other Reed Smith attorney with whom you work if you would like additional information or if you have any questions.

Footnotes

¹ Our prior Client Memos describe each of these developments. For a discussion of the Stark Law provisions in the 2008 proposed MPFS regulations, see our July 24, 2007 Client Memo entitled, “Update on Important Stark Law Developments,” which is available on our website at http://www.reedsmith.com/_db/_documents/hc0706.pdf. Our Oct. 4, 2007 Client Memo entitled “Stark II (Phase III) Final Rule,” describes CMS’s Phase III regulations, which generally went into effect Dec. 4, 2007. That Client Memo is available on our website at http://www.reedsmith.com/_db/_documents/Health_Care_Client_Memo_Stark_II.pdf.

² In the recent past, CMS has dispensed with some of its Stark Law initiatives. For example, CMS proposed some changes to the Stark regulations in the 2008 IPPS proposed rule, but then decided not to adopt them as final. Similarly, CMS did not finalize most of its proposals in the 2008 Medicare Physician Fee Schedule rule (although CMS indicates that those proposals are still under consideration). Additionally, CMS delayed the date of applicability for 12 months for the physician SITS provisions contained in the Phase III final rule for certain entities. Despite CMS’s failure to fully implement its proposed changes in some instances in the past, it is important to recognize that CMS is authorized to implement the proposed changes if it so chooses, and interested persons should not withhold comments on the assumption that CMS will not adopt these proposals.

³ Although a specific Stark Law exception exists for payment arrangements involving components of an AMC exception, the AMC exception is particularly complex and its contours are unresolved. Many academic medical centers have, therefore, relied principally on the indirect compensation arrangements analysis first articulated in the 2001 “Phase I” regulations under the Stark Law. The SITS provisions affect that analysis. Recently, a court concluded that the AMC exception was applicable to a particular funding arrangement between Kosair Children’s Hospital and the University of Louisville Research Foundation. U.S. ex rel. Villafane v. Solinger, No. 3:03-CV-519-H (April 8, 2008). Nevertheless, even following this case, the applicability of this exception to many academic medical centers remains, at best, uncertain.

Tags: Centers for Medicare and Medicaid (CMS), Health Care, In-Patient Prospective Payment System (IPPS), Legislative Developments, Medicare & Medicaid, Stark Law

Posted on March 6, 2008 by Debra A. McCurdy

Operating Notes: Developments Surrounding Outpatient Surgical Facilities Continue to Unfold in 2008

Calendar year 2008 has begun where 2007 ended, by presenting us with a number of legal developments impacting the provision of outpatient surgical care. Keeping up with such developments is a challenge for those of us whose careers revolve around representing outpatient surgical facilities. Keeping up for those who actually own and/or operate such facilities as part of their practices may simply be impossible.

Accordingly, this post details our discussion of selected recent developments in the outpatient surgery arena to be useful. This alert and others that we will forward do not purport to be exhaustive accounts of legal developments impacting ASCs or physician-owned hospitals nationally. Rather, we have identified developments that we found particularly interesting in that they address common themes or questions that we frequently encounter.

Developments on the Specialty Hospital Front

For at least five years now, Congress has “flirted” with the notion of somehow restricting the growth and operation of physician-owned hospitals. On March 5, 2008, the House of Representatives passed H.R. 1424, the Paul Wellstone Mental Health and Addiction Equity Act of 2007, which includes specialty hospital restrictions along the lines of the House/Stark CHAMP Act (H.R. 3162).

In short, H.R. 1424 provides that in order for a hospital to qualify for the whole hospital or rural provider exceptions, the hospital must have had a Medicare provider agreement in effect on the date of enactment (rather than July 24, 2007 in the CHAMP bill). Moreover, those facilities that have a provider agreement in effect on that date and thus are grandfathered are required to meet a series of new requirements within 18 months of enactment, including, among other things: a prohibition on expansion of beds (as noted below, H.R. 1424 would add an exception process); disclosure requirements designed to prevent conflicts of interest; a series of conditions to demonstrate a bona fide investment, including a limit on physician ownership equal to 40 percent of the total value of the investment and 2 percent individual physician investment interest; and certain patient safety provisions.

In a notable change to the CHAMP bill, H.R. 1424 requires the Secretary of the U.S. Department of Health and Human Services to establish and implement a process under which certain hospitals can apply for an exception to the prohibition on expansion of facility capacity. The process would permit an applicable hospital to apply for an exception up to once every two years, and the increase in capacity would be capped at 150 percent of the baseline number of operating rooms and beds. Hospitals would need to meet a number of conditions to be eligible for the exception, including being located in areas with large increases in population, having a high Medicaid population, and being located in an area with certain bed capacity standards.

The White House issued a statement March 5, 2008 opposing the House version of the bill, in part because of the specialty hospital provision:

H.R. 1424 also includes two provisions to offset the approximately $3 billion in on-budget costs associated with the bill. First, the bill would place new restrictions on physician-owned hospitals. The Administration opposes this provision, which is unnecessary and could restrict patient choice without decreasing Medicare costs. HHS already has administrative policies in place to address concerns about physician-owned hospitals, including disclosure of physician ownership, patient safety measures, and revisions to Medicare’s payment systems to better reflect patients’ severity of illness and the resources needed to treat patients.

The text of H.R. 1424 is on the Rules Committee website; the hospital ownership provisions begin at page 390. The White House statement can be viewed by clicking here. Those who are interested in tracking the progress of this legislation should feel free to contact Debra McCurdy, Reed Smith's Health Law Policy Analyst.

Managed Care Payor “Dust Up”

We frequently refer to managed care contracts as the “life blood” of physician-owned surgery centers. Despite the fact that they are unquestionably cost-effective providers of health care services, “sparring” between managed care organizations (“MCO(s)”) and such surgery centers too often proves to be the rule rather than the exception. A major ASC management company located in Ohio has recently experienced one such “dust up” with an MCO that warrants discussion. The facts surrounding this situation illustrate both (i) how MCOs may be responding to the recently implemented APC-based reimbursement system, and (ii) the difficulties for physician-owned ASCs in responding to the actions of MCOs.

When the new ASC reimbursement system was first proposed, we were frequently asked what impact the system might have on arrangements with private payors. MCOs have historically referred to the Medicare system when structuring their contracts. It was not clear if, or when, MCOs might do the same after the 2008 federal reimbursement changes were implemented.

The ASC management company described above operates four ambulatory surgery centers in the greater Cincinnati, Ohio area, and reports that Humana, Inc. recently terminated all existing provider agreements with its centers effective March 31, 2008. This action followed the management company’s rejection of Humana’s proposed change in reimbursement methodology for ambulatory surgery centers beginning Jan. 1, 2008. The insurer’s proposed changes would have resulted in estimated double-digit decreases in reimbursement for 2008. Humana, one of the largest insurers in the Southwest Ohio area, reported that it was revising its reimbursement structure to bring it in line with the major changes to Medicare reimbursement for 2008.

Given the efficiencies that ASCs offer, one might ask why they experience such difficulties in negotiating with MCOs. The dilemma that this management company faces may provide one answer. The management company and others have also speculated that Humana and other insurers keep physician-owned surgery centers out-ofnetwork as part of a plan to obtain more favorable deals with local hospitals. Although ASCs generally provide outpatient surgeries at lower costs to insurers than hospitals do, hospitals may offer better rates on inpatient services if the hospital receives all of the insurer’s patients for outpatient services. This conduct has resulted in antitrust litigation brought by physician-owned surgery centers or surgical hospitals against insurers and hospitals. The success of any antitrust claim will depend on a number of factors, including the specific facts and the market share of the insurers and hospitals. Physician owners of ASCs must know that antitrust claims are difficult to prove, and such actions may be very expensive and require years to complete.

One such example of an antitrust lawsuit, which is being followed closely by those in the industry, is a pending case involving Heartland Spine and Specialty Hospital in Overland Park, Kansas. Heartland, a physician-owned surgical hospital, brought an action against several Kansas City-area acute-care hospitals and major health insurers. Heartland alleges that the defendants conspired with insurers to exclude physician-owned facilities, such as Heartland, from their health plan networks. The Heartland suit alleges that area hospitals with large market shares negotiated agreements with MCOs, which provided for large rate increases if the insurers admitted physician-owned facilities into their networks. While the hospitals argue that limiting competition is in the interest of patient care, physician-owned hospitals and ASCs argue that excluding them from networks limits patient choice and denies patients high quality care. The Heartland case, which was brought in April 2005, is the first suit of its type to proceed to trial, which is reportedly scheduled to begin April 1 of this year. Because of the difficulty and expense in bringing claims against MCOs, the response of most physician-owned ASCs when they have been excluded from networks is to simply operate on an out-of-network basis. MCOs have become increasingly aggressive in responding to what they view as some improper out-of-network practices. The ultimate answer for many ASCs may be to joint venture with their local hospital in the interest of “harmony.” The number of such “JVs” that our firm is handling has increased dramatically.

“Inadvertent CHOWS”

Under Medicare regulations, when a controlling interest in a Medicare participating provider occurs, the provider may be required to obtain a new billing number and proceed once again through the survey process. The disruption that such a change of control process, or CHOW, can impose on a provider can be substantial in that the provider may be required to hold Medicare claims for a number of months while the process plays out. Severe strain on cash flow for the provider can result.

Over the past year, we have witnessed a number of instances where seemingly innocuous actions by providers, such as the mere change of the type of legal entity through which the provider operates, have been deemed to constitute CHOWs, even though the identity of the owners of the provider or its tax identification number remains unchanged. Because of these developments, it may be possible that many providers may be operating without realizing that a CHOW has occurred, and that they are in violation of the provisions applicable to CHOWs. Given the potentially severe penalties involved for not complying with the Medicare CHOW requirements, providers who have undertaken modifications, such as a change of entity, or who are considering doing so, would be well advised to consult on the matter with counsel. Even if such an action has already occurred, counsel’s intervention with the Centers for Medicare and Medicaid Services (“CMS”) may be able to correct the situation to the satisfaction of all concerned parties. The impact that any such changes may have under state regulatory schemes must also be considered.

Tags: Centers for Medicare and Medicaid (CMS), H.R. 1424, H.R. 3162, Health Care, Legislative Developments, Managed Care Organizations (MCO), Medicare & Medicaid, Mental Health Parity, Outpatient Surgical Facilities, Reimbursement, Stark Law

Posted on January 24, 2008 by Debra A. McCurdy

Medicare, Medicaid, and SCHIP Extension Act of 2007 Enacted into Law

President Bush has signed into law S. 2499, the “Medicare, Medicaid, and SCHIP Extension Act of 2007." Most notably, the legislation postpones for six months a 10.1% across-the-board cut in Medicare physician payments that was scheduled to go into effect January 1, 2008.

Other policy changes include, among many others:

• Changes in Medicare long-term care hospital (“LTCH”) policy, including a new statutory definition of an LTCH with facility criteria, relief from certain payment policies for three years, a three-year moratorium on the development of new LTCHs and LTCH beds, no payment update for the last quarter of rate year 2008, and new medical necessity reviews by Medicare contractors;

• Revisions to inpatient rehabilitation facility (“IRF”) qualifications and payment policy, including a permanent freeze in the patient classification criteria compliance threshold at 60% (with comorbid conditions counting toward this threshold) and a payment freeze from April 1, 2008 through September 30, 2009;

• An extension of the therapy cap exception process through June 30, 2008;

• A provision to require the Centers for Medicare & Medicaid Services (“CMS”) to adjust Part B drug average sales price (“ASP”) calculations to use volumeweighted ASPs based on actual sales volume;

• Elimination of Medicare Advantage (“MA”) stabilization funding for regional preferred provider organizations in 2012, an extension of authority for specialized MA plans for special needs individuals, and a moratorium on new special needs plans and expanded service areas through December 31, 2009;

• A 6-month delay in CMS rules on Medicaid payment for school-based and rehabilitation services; and 1 Pub. L. No. 110-173 (December 29, 2007). The text of the Act is available by clicking here.

• An extension of the authorization and funding of the State Children’s Health Insurance Program (“SCHIP”) through March 31, 2009.

To read Reed Smith's summary of the major provisions of the Act, please download the PDF here.

Tags: Centers for Medicare and Medicaid (CMS), Drug Pricing, Health Care, Legislative Developments, Long-Term Care Hospital (LTCH), Medicaid, Medicare, Medicare & Medicaid, Reimbursement, SCHIP

Posted on January 9, 2008 by Debra A. McCurdy

Expansion of Medicare DMEPOS Competitive Bidding Announced

This post was written by Debra McCurdy, Carol Loepere, and Elizabeth Carder-Thompson.

I. INTRODUCTION

On January 8, 2008, CMS announced the second phase of Medicare competitive bidding for durable medical equipment (“DME”), prosthetics, orthotics, and supplies (“DMEPOS”). In this second round, competitive bidding will be implemented in 70 areas, including the nation’s largest cities. The complete list of areas can be found at Appendix 1. With very limited exception, only suppliers who are successful bidders in these regions and who meet program standards (including accreditation) will be eligible to furnish eight categories of DMEPOS to Medicare beneficiaries beginning next year. Successful bidders will be paid based on the median of the winning suppliers’ bids for each of the selected items in the region, rather than the Medicare fee schedule or supplier bid amount.

This expanded bidding program builds on the first phase of competitive bidding affecting ten geographic regions and ten product categories, which goes into effect July 1, 2008. Suppliers in the new bidding regions and other affected entities (including DMEPOS manufacturers, nursing homes, physicians) should take this opportunity to prepare for the bidding process to be conducted later this year, as discussed below.

II. BRIEF LEGISLATIVE & REGULATORY BACKGROUND

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”) requires the Secretary of Health and Human Services to implement competitive acquisition programs for DMEPOS beginning in 2007. Eligible products include:

(1) DME (including DME used with infusion and drugs, other than inhalation drugs) and supplies used in conjunction with DME;

(2) enteral nutrients, equipment, and supplies; and

(3) off-the-shelf orthotics. The MMA excludes from competitive acquisition inhalation drugs; parenteral nutrients, equipment, and supplies; and Class III devices. Moreover, the Secretary may exempt rural areas and areas with low population density in urban areas (unless there is a significant national market through mail order for particular items), and items and services unlikely to result in significant savings.

The Secretary is directed to establish competitive bidding areas (“CBAs”), which may differ for different items and services. Competitive acquisition will be phased in geographically, applying to ten of the largest MSAs in 2007, a total of 80 MSAs in 2009, and additional MSAs thereafter. The Secretary also may phase in competitive acquisition programs first among the highest cost and highest volume items and services or those that have the largest savings potential.

For each competitive acquisition area, the Secretary must solicit bids by suppliers to supply certain covered items. Only successful bidders may supply the covered items in the CBA, and they will be reimbursed based on the bid amount. The Secretary must ensure that small suppliers have the opportunity to be considered for participation under the program. In order to be awarded a contract, bidding entities must meet new quality standards for suppliers, along with financial standards specified by the Secretary. Total amounts paid under the contracts are expected to be less than would be paid otherwise, and beneficiary access to multiple suppliers must be maintained. The Secretary may limit the number of contractors in a competitive acquisition area to the number needed to meet projected demand. CMS published its proposed rule to implement the DMEPOS competitive bidding program on May 1, 2006, and it published the final rule on April 10, 2007.¹ Note that other important details regarding contracting and bidding, along with a variety of educational materials, are being released by Palmetto GBA, the Competitive Bidding Implementation Contractor (“CBIC”).²

III. PHASE ONE OF BIDDING

CMS conducted the first round of DMEPOS competitive bidding last summer, and the deadline for bidding was September 25, 2007. The first round covers the following ten metropolitan statistical areas (“MSAs”):

(1) Charlotte-Gastonia-Concord, NC-SC;

(2) Cincinnati-Middletown, OH-KY-IN;

(3) Cleveland-Elyria-Mentor, OH;

(4) Dallas-Fort Worth- Arlington, TX;

(5) Kansas City, MO-KS;

(6) Miami-Fort Lauderdale-Miami Beach, FL;

(7) Orlando-Kissimmee, FL;

(8) Pittsburgh, PA;

(9) Riverside-San Bernardino-Ontario, CA; and

(10) San Juan-Caguas-Guaynabo, PR.

Ten categories of DMEPOS are included in phase one³:

(1) Oxygen Supplies and Equipment;

(2) Standard Power Wheelchairs, Scooters, and Related Accessories;

(3) Complex Rehabilitative Power Wheelchairs and Related Accessories;

(4) Mail-Order Diabetic Supplies;

(5) Enteral Nutrients, Equipment, and Supplies;

(6) Continuous Positive Airway Pressure Devices, Respiratory Assist Devices, and Related Supplies and Accessories;

(7) Hospital Beds and Related Accessories;

(8) Negative Pressure Wound Therapy Pumps and Related Supplies and Accessories;

(9) Walkers and Related Accessories; and

(10) Support Surfaces (Group 2 mattresses and overlays), although this category is subject to bidding only in Miami-Fort Lauderdale-Miami Beach, FL and San Juan-Caguas-Guaynabo, Puerto Rico.

CMS currently is in the process of evaluating supplier bids from the first round. Under an evaluation process established in the final rule, CMS calculates a composite bid for each supplier, which represents the sum of a supplier’s weighted bids for all items within a product category. Composite bids of suppliers who otherwise meet the eligibility standards are ranked in order from lowest to highest, and the lowest composite bid for a product category that will include a sufficient number of suppliers to meet expected beneficiary demand is selected as the pivotal bid. Suppliers whose composite bids are less than or equal to the pivotal bid are selected as winning suppliers if they meet all other program requirements.

CMS expects to announce the winning suppliers and bid prices for the first round in February 2008. The program goes into effect July 1, 2008.

IV. PHASE TWO EXPANSION

On January 8, 2008, CMS announced the 70 MSAs and eight product categories that will be included in the second round of competitive bidding. The expanded bidding program will include the three largest MSAs - New York, Los Angeles, and Chicago. The complete listing of MSAs can be found at Appendix 1, and the specific zip-codes included in each CBA will be released in the future.

CMS is including eight of the ten product categories from round one in the second round of bidding:

1 – Oxygen Supplies and Equipment

2 – Standard Power Wheelchairs, Scooters, and Related Accessories

3 – Complex Rehabilitative Power Wheelchairs and Related Accessories

4 – Enteral Nutrients, Equipment, and Supplies

5 – Continuous Positive Airway Pressure Devices, Respiratory Assist Devices, and Related Supplies and Accessories

6 – Hospital Beds and Related Accessories

7 – Negative Pressure Wound Therapy Pumps and Related Supplies and Accessories

8 – Walkers and Related Accessories

The specific codes to be included in this round have not yet been released, but are expected to be made available this spring. Suppliers can bid on one or more product categories, but must bid on all specified codes within the category. Note that although diabetes supplies are not listed in this round of bidding, CMS officials indicated in a January 8, 2008 press conference that they are preparing to conduct nationwide competitive bidding for diabetes supplies in the future. CMS also announced that it will continue its controversial policy from round one of requiring nursing homes in CBAs to be winning bidders in order to supply covered DMEPOS items to their own residents under their own Part B supplier number. CMS will allow nursing homes to bid to serve their own residents exclusively, however, without having to meet a general requirement that suppliers serve an entire CBA. If a nursing home does not bid or if it is not a successful bidder, it will be required to use a winning bidder to furnish covered Part B items to its residents. In a related provision, CMS is continuing to allow physicians and certain other practitioners, along with physical therapists and occupational therapists in private practice, to furnish certain items exclusively to their patients at the single bid price without going through the bid process.

CMS plans to launch a 60-day bidding period later this year, with the second phase going into effect next summer. A more detailed timeline will be provided in the coming months.

V. ACTION STEPS FOR POTENTIAL BIDDERS

CMS’s early announcement of the geographic regions and product categories for round two provides an important opportunity for suppliers and other potentially-affected entities to prepare for bidding.

Most importantly, suppliers in upcoming CBAs should start the accreditation process if they have not already done so. While CMS recently announced that all Medicare suppliers will be required to be accredited as meeting DMEPOS quality standards by September 30, 2009, CMS has indicated that bidding suppliers will need to be accredited “well in advance of that deadline” in order to be awarded a contract.⁴
Although the specific product codes for round two have not yet been announced, suppliers can use the round one codes as a guide to begin considering what models/brands they would be able to supply in each category, potential pricing strategies, and their expected capacity to furnish the items. Suppliers also should assess the impact of various reimbursement scenarios on their business, since ultimate payment amounts may vary from a supplier’s submitted bid.
Potential bidders can use the round one bidding materials as a roadmap for compiling the extensive financial data and other documents that are required for the bid submission.⁵
Small suppliers can familiarize themselves with the rules for forming networks to determine their eligibility and assess the potential benefits and drawbacks of network bidding.
Manufacturers also should be preparing for changes in the marketplace in the CBAs. Among other things, manufacturers can plan to work with major suppliers
Nursing homes in the new CBAs should assess their options for furnishing covered items to their Medicare residents, either through participating as a bidder (in which case the nursing home must be an accredited Part B supplier) or contracting with a winning supplier.
Affected parties should continue to monitor the CMS and CBIC web sites for announcements regarding specific items and locations to be included in round two, along with pre-registration requirements and the opening of the bidding window.⁶

Endnotes

1 A Reed Smith client memo providing a detailed analysis of the final rule is available here.

2 See http://www.dmecompetitivebid.com.

3 A detailed listing of the products included within each category is available here.

4 For information on the quality standards, see this link.

5 For more information on the actual application and document submission requirements, see the DMEPOS Competitive Bidding Program.

6 See http://www.cms.hhs.gov/competitiveacqfordmepos/01_overview.asp and http://www.dmecompetitivebid.com/cbic/cbic.nsf/(pages)/home, respectively.

Tags: Centers for Medicare and Medicaid (CMS), DMEPOS, Health Care, Medicare & Medicaid, Regulatory Developments, Reimbursement

Life Sciences Legal Update
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Life Sciences Legal Update : Life Sciences Lawyers & Attorneys : Reed Smith Law Firm : Healthcare, Food and Drug Law, Biotechnology, Privacy, Product Liability

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Analysis and commentary by Reed Smith on trends and developments in life sciences and health care law.

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