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Significant Recent Regulatory and Statutory Developments

Month: October 2019

Significant Recent Regulatory and Statutory Developments

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New Stark and Anti-Kickback Exceptions: Just yesterday, the Department of Health and Human Services issued proposed rules that have yet to be published in the federal registry, that loosen the prohibitions in the Stark Law and Anti-Kickback Statute to include new exceptions centered on value-based arrangements.  The OIG drafted the proposed rule regarding the Anti-Kickback Statute and CMS drafted the proposed rule regarding the Stark Law.  Although there are many significant changes, one of those changes is revising the definition of fair market value “to eliminate the connection to the volume or value standard,” which should eliminate a lot of ambiguity in the law. These changes are widely viewed as another push by the federal government toward value-based payments.  To review the proposals, click here and here.  

Medicare Expansion: On October 3, 2019, President Donald Trump signed an executive order directing the Health and Human Services Secretary to implement wide-ranging changes to Medicare Advantage, an increasingly popular program providing private Medicare plans for seniors.   The order aims to provide more plan choices to seniors by encouraging innovative Medicare Advantage benefit structures and plan designs, such as regulatory changes to improve accessibility to Medicare Medical Savings Accounts.  The order also calls for a payment model that adjusts supplemental Medicare Advantage benefits to allow Medicare beneficiaries to share more directly in the savings from the program, including cash and monetary rebates.   The order emphasizes that Medicare FFS should not be advantaged or promoted over Medicare Advantage with respect to its administration.  For a copy of the complete executive order, click here.

HR 4387 – Approved – This federal statute reduces drug prices under the Medicaid Drug Rebate Program.  Some manufacturers make their own generic version of their brand name drugs, known as “authorized generics.”  A manufacturer can sell its authorized generic version to a secondary manufacturer for distribution, but if that secondary manufacturer has a corporate relationship with the brand-name drug company, the brand-name company may intentionally charge a much lower “transfer” price than it would otherwise charge an unrelated company.  This would have the effect of reducing the Medicaid rebates the manufacturer pays for its brand-name drug because the formula used to determine rebate amounts is based on the Average Manufacturer Price (AMP), which incorporates the price of authorized generics.  This bill eliminates authorized generics from the calculation of rebates.  This is the second provision related to the Medicaid Drug Rebate Program that was enacted this year.  In April 2019, Congress enacted H.R. 1839, which included a provision to deter the problem of misclassification by drug manufacturers of their brand-name drugs as generics to lower the rebates they must pay, since the minimum base rebate for generic drugs is 13% of AMP compared to 23.1% for brand-name drugs.  For the complete statute, click here.

If you have any questions, please contact Khaled J. Klele, Latoya Caprice Dawkins, or Ryan M. Magee.

The list above does not include every proposed or adopted legislation, litigation or guidance document that may impact the healthcare industry.  Instead, it includes only a select few chosen by the authors, and any information in this post is not intended to provide legal advice.  If you are concerned that a proposed or adopted legislation, litigation or guidance document may impact your practice, then you should seek legal advice.  Nothing in this post should be relied upon as legal advice in any particular matter. © 2019 Riker Danzig Scherer Hyland & Perretti LLP.

FDA Releases New Guidance

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On September 27, 2019, the Food and Drug Administration (FDA) released new guidance, replacing the December 2017 guidance, regarding clinical decision support (CDS) software. The new guidance expands the scope of the agency’s control of CDS software developed for providers, patients, and caregivers and clarifies which kind of software no longer is considered to be a medical device under the law.  The guidance is a part of a series of guidance documents which signal the agency’s stance on and encouragement of health IT development.  The new guidance clarifies the types of CDS software functions that would be subject to FDA oversight, categories that are exempt from regulatory requirements because they are low risk to patients, and categories that do not meet the definition of a medical device. For the complete guidance document, click here.

On September 17, 2019, a federal judge in the District of Columbia ruled in favor of the American Hospital Association and held that CMS exceeded its statutory authority when it reduced Medicare payments for hospital outpatient services provided in off-campus provider-based departments (“PBDs”) grandfathered under the Bipartisan Budget Act of 2015.  American Hospital Association, et al. v. Alex Azar, II, et al, CA No. 18-2841.  Despite the statutory exception created in the Bipartisan Budget Act, CMS promulgated a final rule which lowered the reimbursement rate for PBDs. Before the final rule, services provided at PBDs were reimbursed at the same rates as services provided on the main campuses of hospitals because the off-campus provider-based locations were subject to the same regulatory requirements and cost structures as hospitals. The court’s decision vacated the applicable portions of final rule and remanded the case to CMS for further action consistent with the correct legal standards. For the complete decision, click here.   

If you have any questions, please contact Khaled J. Klele or Latoya Caprice Dawkins.

New Jersey’s Appellate Division Holds Tenants Who Entered Pay-and-Go Judgment Barred from Later Bringing Counterclaim Against Landlord Based on Events from Before the Judgment

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In a decision approved for publication, the New Jersey Appellate Division recently held that tenants who entered into a pay-and-go consent judgment with their landlord were barred from bringing a counterclaim against the landlord in a subsequent proceeding because the claim should have been raised in the prior negotiations.  See Raji v. Saucedo, 2019 WL 4741165 (N.J. Super. Ct. App. Div. Sept. 30, 2019).  In the case, the plaintiff landlord rented a house to the defendant tenants.  After the tenants failed to pay rent in November 2017, the landlord brought a summary dispossess action.  The parties then entered into a pay-and-go consent judgment in January 2018 whereby the tenants agreed to pay a fixed amount to the landlord and vacate the leased premises before April 2018.  The tenants failed to make the required payments and the landlord locked them out.  The landlord then brought this action seeking monetary damages for the tenants’ missed payments under the judgment.  The tenants filed a counterclaim alleging they paid $9,000 to fix the pool at the leased premises in November 2016 and that the landlord was required to reimburse them for those costs.  The trial court dismissed the counterclaim, and the tenants appealed.

On appeal, the Court affirmed.  It found that, despite the tenants’ argument, the trial court’s dismissal of their counterclaim was not based on the entire controversy doctrine, but was based on the fact that the parties had reached an accord and satisfaction of their claims by entering into the pay-and-go judgment.  Although the Court agreed that parties are not permitted to assert claims for damages in summary dispossess actions, “when negotiating and consenting to a pay-and-go agreement, parties inherently intend to resolve all differences arising out of the tenancy and enter into what the law refers to as an accord and satisfaction: a mutual exchange of interests that fully discharges all claims, replacing them with the judgment’s express terms.”  Accordingly, this subsequent action was limited to claims arising from the pay-and-go judgment and any prior claims were barred.  “[E]ven though the nature of the summary dispossess action did not permit the filing of a counterclaim for monetary relief, defendants were obligated – when negotiating in good faith the pay-and-go judgment – to assert any claims they may have had against plaintiff arising from the tenancy.”

For a copy of the updated statute, please contact Michael O’Donnell at modonnell@riker.com or Anthony Lombardo at alombardo@riker.com.

The Interplay Between the Corporate Practice of Medicine and Management Services Organizations

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In a recent decision by the New York Court of Appeals, which is New York’s highest court, the Court held that payors can withhold amounts paid to a provider if the provider violates the corporate practice of medicine by ceding too much control to a management service organization (MSO). Andrew Carothers, M.D., P.C. v. Progressive Insurance Company, Docket No. APL-2017-00225 (2019). 

In this matter, Dr. Carothers established a professional corporation (PC) to provide MRI services. The PC then agreed to lease MRI facilities and equipment from companies owned and controlled by non-physicians, which acted as an MSO to the PC. The PC provided MRI services to car accident patients, who assigned “no fault” insurance benefits to the PC, which then billed the insurance companies. The insurance companies began to withhold payments and the PC eventually filed suit to recover these payments. On appeal, the PC claimed the insurance companies needed to demonstrate fraud to deny payment, but the Court disagreed. The Court held that it is well settled in New York that an insurance company can “withhold reimbursement for no-fault claims that are provided by fraudulently incorporated enterprises to which patients have assigned their claims.” The Court continued, however, and held that “fraudulently incorporated” may be misleading and does not actually require proof of fraud.

As in many jurisdictions, in New York, the corporate practice of medicine prevents unlicensed persons from exercising control of professional corporations because it would create an ethical conflict. In other words, it prevents medical services from being provided by unlicensed third parties with only monetary interests. Here, the jury found that the PC breached this rule by ceding too much control to non-physicians and, therefore, was “fraudulently incorporated.” The Court agreed because: (i) the equipment leases were far above the fair market value and, in one year, the Court found that the difference between fair market value and what was charged was $4,680,000; (ii) the MSO had the right to terminate each lease without cause, regardless of payment, but the PC could not terminate the leases at all; (iii) Dr. Carothers barely provided oversight of the provision of medical services since he reviewed at most 79 reports out of a total of some 38,000, and he was not involved in evaluating or disciplining employees; and (iv) Dr. Carothers was not involved with the business operations and, instead, delegated duties to a non-physician, who ran the business of the P.C., and who funneled millions of dollars to herself and the MSO from the PC’s bank account.

Considering that MSOs have been extremely popular, especially in venture capital deals, it is important to make sure that your corporate structure with the MSO is based on, among other things, fair market value and that physicians retain control over medical decisions. 

If you have any questions, please contact <a href="mailto:Khaled J. Klele or <a href="mailto:Latoya Caprice Dawkins.

D.C. Circuit Court of Appeals Reinstates 2017 DSH Rule to Include Third Party Payments in DSH Calculation

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The debate over the methodology to calculate Disproportionate Share Hospital (DSH) reimbursement to hospitals continues. In June, we updated you on Azar v. Allina Health Services when the Supreme Court vacated an HHS policy requiring DSH hospitals to include Medicare Part C enrollees in their Medicare fraction because HHS did so without going through the notice and comment period set by the Medicare Act for a substantive legal change.

On August 13, 2019, in Children’s Hospital Association of Texas, et al. v. Azar, the U.S. Court of Appeals for the District of Columbia Circuit overturned a district court ruling that CMS’s DSH 2017 final rule (the "2017 final rule") on the Medicaid DSH program limit calculation violated the Medicaid Act. The 2017 final rule requires hospitals to exclude Medicare and private insurers payments they receive from their calculations of DSH payment caps. DSH hospitals serve a “disproportionate share” of low-income individuals and receive an upward adjustment to their Medicare rates in their DSH payments. 

As noted above, the district court initially vacated the 2017 final rule, but the U.S. Court of Appeals reversed the district court's decision. The end result - this ruling will lower the cap on DSH payments and cause some hospitals, such as safety net providers like children’s hospitals, to receive less DSH payments.
The Court opined that Congress “did not intend to exclude Medicare and private insurance payments” from the methodology used and expressed concern over “double dipping” if hospitals receive DSH payments and reimbursement from Medicare or private insurers for the dual-eligible patients. “[B]y requiring the inclusion of payments by Medicare and private insurers, the 2017 Final Rule ensures that DSH payments will go to hospitals that have been compensated least and are thus most in need,” the Court wrote. We will continue to update you on this issue.

If you have any questions, please contact <a href="mailto:Khaled J. Klele or <a href="mailto:Latoya Caprice Dawkins.

Two Recent OIG Advisory Opinions

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As technology continues to be a pervasive platform for the healthcare industry in improving patient care, the Office of Inspector General of the Department of Health and Human Services (OIG) posted Advisory Opinion 19-04 which approved a technology company’s proposal to make visible to federal healthcare program beneficiaries its online healthcare directory for searching and booking medical appointments and sponsored advertisements. The company employs a proprietary algorithm which returns up to 200 results and the users are not charged any fees or offered anything of value. Those same healthcare providers pay flat monthly subscription fees or annual subscription fees, per-click or per-booking fees, to be listed in the company’s directory and may choose to pay for sponsored advertisements on the company’s directory and third-party websites. The OIG concluded that the proposed arrangement would not violate the anti-kickback or civil monetary penalty provision statutes for numerous reasons, one of which being the many factors that influences a user’s ultimate choice of healthcare professionals, and mere access alone to the company’s website would be unlikely to induce a user to select a particular provider over another. For the Advisory Opinion, click here. 

At the same time the OIG issued 19-04, the OIG issued Advisory Opinion 19-05 allowing a proposal for a community health center (the “Requestor”) to purchase real estate from a limited liability company (LLC) owned and managed by an excluded individual. The OIG's List of Excluded Individuals/Entities (LEIE) consists of individuals and businesses that have been convicted of offenses in connection with federal healthcare programs and, therefore, must be excluded from all Medicare, Medicaid, and other federal healthcare programs. The OIG indicated the proposed arrangement would not run afoul of the civil monetary penalties law because the proposal did not involve the provision of an item or service for which payment may be made under any federal healthcare program. Under the Proposed Arrangement, the Requestor would purchase real estate including a medical clinic already operated by the Requestor from a company owned and managed by an excluded individual. The Requestor would obtain an independent appraisal for the real estate and not maintain an ongoing relationship with the excluded individual after the purchase. Importantly, the Requestor certified that the purchase would not entail claims to federal healthcare programs or use federal grant funds. This Opinion provides important insight into the OIG’s interpretation of the prohibition against contracting with excluded individuals and its analysis of when real estate becomes an “item” under the 1128A(a)(6) of the Social Security Act. For the Advisory Opinion, click here.

Both opinions contained the traditional disclaimer that the advisory opinion can only be relied upon by the specific company that requested it, but a recent proposed regulation, 84 FR 40482-01, that we previously reported on may alter this longstanding rule. For the proposed regulation, click here.

If you have any questions, please contact <a href="mailto:Khaled J. Klele or <a href="mailto:Latoya Caprice Dawkins.

New York Federal Court Grants Mortgage Lender’s Motion to Dismiss RESPA Claims

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The United States District Court for the Eastern District of New York recently granted a lender’s motion to dismiss an action in which the borrower alleged violations of the Real Estate Settlement Procedures Act (“RESPA”) for the lender’s failure to properly respond to three qualified written requests (“QWRs”) and for improperly reporting the borrower’s credit score to reporting agencies despite having received notices of error.  See Jackson v. Caliber Home Loans, 2019 WL 3426240 (E.D.N.Y. July 30, 2019).  In 2014, the borrower received two home mortgage loans from the lender’s predecessor-in-interest and, two years later, the borrower filed for Chapter 7 bankruptcy protection.  The borrower subsequently signed two loan modification agreements with the lender which were endorsed by the bankruptcy court.  In 2018, counsel for the borrower sent the lender three letters requesting information on both loans and seeking to have the lender treat the letters as a request for information and as a notice of error.  The lender responded to two of the three letters addressing some requests for information while refusing to answer others.  The borrower brought this action alleging two violations of RESPA and seeking both actual and statutory damages as a result.  First, the borrower claimed the lender violated § 2605(e)(3) by providing information to consumer reporting agencies regarding overdue payments allegedly owed by the borrower that were related to her QWRs.  Second, the borrower claimed that the lender violated § 2605(e)(2)(C) by failing to provide the borrower with the information and documentation requested, or an explanation why the information sought was unavailable, no later than 60 days after receipt of the borrower’s QWR.

The Court first had to determine whether the three letters sent by the borrower’s counsel were QWRs, thereby invoking RESPA’s private right of action for a servicer’s failure to comply with the Act. See § 2605(e)(1)(B).  A QWR can be classified as either a request for information, which seeks information relating to the servicing of a mortgage loan, or as notice of error, which asserts an error relating to the servicing of a mortgage loan.  See 12 C.F.R. § 1024.35(a); 12 C.F.R. § 1024.36(a).  If a servicer receives a notice of error, it must comply with the provisions of  § 2605 which include, inter alia, refraining from sending the borrower’s information regarding any overdue payment and relating to the QWR for a period of 60 days.  See § 2605(e)(2)(A)-(C); § 2605(e)(3).  The Court found that the first two letters sent constituted requests for information because they requested information regarding the servicing of loans while the third letter—which sought information related to the origination and alleged modification of the borrower’s loans—fell outside the ambit of § 2605.  Next, the Court held that none of the three letters sent by the borrower’s counsel constituted a notice of error because they failed to assert an error with the servicing of the lender’s mortgage loans with requisite specificity.  See § 2605(e)(1)(B)(ii).  Therefore, the Court held that the borrower failed to state a claim because none of the letters qualified as a notice of error thereby forbidding lender from sending the borrower’s information regarding overdue payment to a consumer reporting agency under § 2605(e)(3).

The Court found, however, that the borrower properly alleged that the lender failed to provide her with all of the requested information regarding her loans and/or an explanation of why the requested information was unavailable as required by § 2605(e)(2)(C).  Even so, the Court held that the borrower failed to allege any actual damages as a result of lender’s RESPA violations and failed to allege a significant number of RESPA violations to entitle her to recover statutory damages.  Accordingly, the Court granted the lender’s motion to dismiss the complaint and denied the borrower’s motion to amend.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Anthony Lombardo at alombardo@riker.com.

Nebraska Appellate Court Holds Title Insurer Not Obligated to Indemnify Insured for Foreclosure of Excepted Mortgage, Even if Foreclosure Was Caused by Prior Owner’s Cross-Default Under Separate Loan

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The Court of Appeals of Nebraska recently held that an insured owner was not entitled to coverage when a lender foreclosed on its property based on a prior mortgage that the insured had assumed and that was excepted in the policy, even if the foreclosure was initiated based on the mortgage’s cross-default provision and caused by the prior owner’s default on a separate loan not mentioned in the policy.  See Fo Ge Investments LLC v. First Am. Title, 27 Neb. App. 671 (2019).  In the case, the insured agreed to purchase a property in 2006.  As part of the agreement, the insured agreed to purchase subject to the seller’s existing mortgage on the property and to take over the seller’s monthly payments.  The mortgage was from 2002 and secured a loan to the seller in the amount of $272,000.  In December 2006—six weeks before the closing—the seller obtained a second loan from the same lender, and this debt was secured by the assignment of a life insurance policy.  The title insurance company issued a policy and specifically excluded the 2002 mortgage.  The policy did not mention the 2006 second loan because that loan was not secured by a mortgage on the property.  The lender later brought a foreclosure action against the property based on a default under the 2002 mortgage.  The insured filed a claim under the policy and the insurer denied it.  The insured then brought this action.  According to the insured’s complaint, the 2002 mortgage contained a cross-default position that allowed the lender to foreclose when the seller defaulted on its 2006 loan, which the insured did not assume.  The insured sought coverage under the argument that the 2002 note and mortgage were excepted from the policy, but the 2006 note was not.  The trial court granted the title insurance company’s motion for summary judgment.

On appeal, the Court affirmed.  The Court found that “[e]ven if a default on the 2006 note was the basis for foreclosure, it was still the 2002 mortgage that was being foreclosed. That mortgage was a known lien at the time the title insurance policy was issued and a specific exception was made.”  The insured also argued that the exception in the policy was limited to a default under the 2002 note because the exception stated that the mortgage was “securing the principal amount of $272,000.00.”  The Court found that this description of the mortgage did not limit the exception to the 2002 note:  “The language that identified $272,000 as being the principal amount secured merely gives a more specific description of the mortgage. It does not limit in any way what is being excluded.”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Anthony Lombardo at alombardo@riker.com.

New York Court Holds Lender Affirmatively Revoked Debt Acceleration by Discontinuing Foreclosure Action; Borrower’s Spouse Who Did Not Sign Note Not Entitled to RPAPL 1304 Notice

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The New York Supreme Court, Westchester County, recently held that a lender’s foreclosure action was not barred by the statute of limitations because the lender affirmatively revoked the acceleration of a loan by discontinuing a prior foreclosure action, and also held that the borrower’s wife, who signed the mortgage but not the note, was not entitled to a pre-foreclosure notice under RPAPL 1304.  See Deutsche Bank Nat'l Tr. Co. as Tr. for IndyMac IMJA Mortg. Loan Tr. 2007-A2, Mortg. Pass-Through Certificates Series 2007-A2 v. Weininger, 2019 WL 3884569 (N.Y. Sup. Ct. Aug. 15, 2019).  In the case, the plaintiff bank gave a $875,000 loan to the defendant borrower in 2007, and the borrower and his wife executed a mortgage securing their residence.  In May of 2010, they missed their monthly installment payment and defaulted on the loan.  Plaintiff brought a foreclosure action in October 2010, but discontinued the action in August 2016.  In March 2017, plaintiff brought this foreclosure action and later filed this motion for summary judgment.  The borrower and his wife cross-moved for summary judgment, arguing (i) the action is untimely because it was not brought within six years of when plaintiff accelerated the debt (October 2010); and (ii) plaintiff did not comply with RPAPL 1304 because it did not send a timely pre-foreclosure letter to the borrower’s wife.

The Court denied the homeowners’ motion and granted plaintiff’s.  First, the Court found that the action was timely.  Although plaintiff accelerated the debt in October 2010 when it brought the first action, it affirmatively revoked this acceleration in August 2016 when it filed its motion to discontinue that action and the Court granted the motion.  Additionally, plaintiff agreed to a loan modification in 2014, which also revoked the acceleration.  Second, the Court found that the borrower’s wife was not entitled to notice under RPAPL 1304.  RPAPL 1304 requires foreclosing lenders to provide pre-foreclosure notice to “the borrower.”  In this case, the borrower’s wife executed the mortgage but did not execute the note.  Although the Court acknowledged other cases in which courts found that spouses who sign only the mortgage were entitled to notice because the mortgages made them liable on the debt, the mortgage in this case expressly stated that anyone who does not sign the note “is not personally obligated to pay the Sums Secured[.]”  Therefore, the wife was not a “borrower” and not entitled to notice.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Dylan Goetsch at dgoetsch@riker.com.

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