Indiana Law Review


Survey of Recent Developments in Health Law

Ice Miller LLP*

Introduction

This survey summarizes recent developments in case law, legislation, and

administrative actions that affect the health care industry. Not meant to be an

exhaustive review, this survey details the "hot" topics in the health care industry

this year.

I. Medicare Part D Prescription Drug Benefit

In 2003, Congress passed, and the President signed, the Medicare

Prescription Drug, Improvement, and Modernization Act of 2003 ("MMA"), a
principal purpose of which was to add a prescription drug benefit to the Medicare

program.' In 2005, the Centers for Medicare and Medicaid Services ("CMS")
took a number of steps to implement the Part D drug benefit in anticipation of the
January 1, 2006, commencement of the benefit. Most notably, on January 28,
2005, CMS issued a Final Rule implementing Part D.^ The Final Rule is quite
complex and the following is merely a summary highlighting some of its major
provisions.

A. Overview ofPart D Benefit and Sponsors

The Part D prescription drug benefit is not provided directly through CMS.
Instead, CMS contracts with "Part D sponsors" to provide the benefit. Part D
sponsors may include Prescription Drug Plan ("PDP") sponsors, Medicare
Advantage organizations that offer a Medicare Advantage Prescription Drug
plan, a PACE organization offering a PACE plan, or a cost plan offering
prescription drug coverage.^ The Final Rule sets forth a myriad of requirements

* The following Ice Miller LLP attorneys contributed to the research and drafting of this
article: Jamie Brashear, Jenifer Brown, Sarah Cotterill, Tami Eamhart, Margaret Emmert, Sherry
Fabina-Abney , Natalie Fierek, Cassandra Giles, Beth Hatfield, Blaire Henley, Gregory Pemberton,

Susan Rivas, Chris Sears, Myra Selby, Paul Sinclair, Taryn Smith, Skip Whaley, Brad Williams,
and Kevin Woodhouse.

1. Pub. L. 108-173, 1 17 Stat. 2066 (Dec. 8, 2003).

2. 70 Fed. Reg. 4194 (Jan. 28, 2005) (to be codified at 42 C.F.R. pts. 400, 403, 411, 417,

and 423).

3. 42 C.F.R. § 423.4 (2005). A "PDP sponsor" is a nongovernmental entity that is certified
by CMS as meeting the requirements and standards of the Part D regulations that apply to entities
that offer prescription drug plans. Id. A PDP is prescription drug coverage that is offered under
a policy, contract, or plan that has been approved as specified in the Part D regulations and that is
offered by a PDP sponsor that has a contract with CMS that meets the requirements of the Part D
regulations. Id. PACE stands for programs of all-inclusive care for the elderly. 42 C.F.R. § 460.6.
A "cost plan" is a plan operated by a Health Maintenance Organization or a Competitive Medical
Plan in accordance with a cost-reimbursement contract under section 1 876(h) ofthe Social Security

Act. 42 C.F.R. § 423.4. Part D coverage may also be provided through a "fallback" prescription



1052 INDIANA LAW REVIEW [Vol. 39:1051

relating to an annual bid process for prescription drug plans approved by CMS,
premium setting, risk retention, application procedures, requirements, and
contracts between CMS and Part D plans/ In general, a Part D plan applicant
must: ( 1 ) complete an application; (2) be organized and licensed under State law

as a risk bearing entity eligible to offer health insurance or health benefits

coverage in each State in which it offers a Part D plan; (3) adhere to minimum
enrollment requirements; (4) maintain administrative arrangements satisfactory

to CMS related to management, personnel, bonding, insurance, and compliance;
(5) not have non-renewed a contract with CMS within the past two years (subject
to certain exceptions); (6) not have submitted a bid or offered a fallback

prescription drug plan in accordance with specified rules; (7) agree to CMS
audits to detect and prevent fraud and abuse; and (8) agree to certain severability

conditions.^ The Final Rule amplifies these conditions by setting forth detailed
provisions relating to the actual terms of contracts between CMS and Part D
sponsors, which include details about termination and non-renewal of contracts.^

Part D provides coverage for most outpatient drugs that may be dispensed by
a prescription for medically accepted indications, as well as insulin and medical

supplies associated with the injection of insulin, including syringes, needles,

alcohol swabs, and gauze.^ It also includes vaccines licensed under the Public

Health Services Act and certain biological products. Part D does not cover drugs
for which payment is available under Medicare Parts A or B, and a PDP or MA-
PD plan may also exclude coverage if the drug was not prescribed in accordance
with the plan or Part D (such as if the drug was not covered under the plan's
formulary).^

Part D sponsors must provide either "standard prescription drug coverage"
or "alternative prescription drug coverage."^ Standard prescription drug coverage

has an annual deductible for enrollees of $250. After an enroUee meets the

deductible, the enrollee's prescription drug costs between $250 and $2250 (the

"initial coverage limit") are subject to a coinsurance payment by the enrollee

drug plan. 42 C.F.R. §§ 423.851 to -.875. Fallback drug plans are those that offer standard or

alternative coverage, provide access to negotiated prices, and meet the other requirements for

prescription drug plans. CMS, however, has the authority to waive requirements of the Final Rule

for fallback prescription drug plans if it is necessary to ensure that each enrollee has the choice of

at least two prescription drug plans in the area in which the enrollee resides. However, due to the

strong participation of private prescription drug plans in all areas, the fallback provisions are not

currently necessary.

4. 42 C.F.R. §§ 423.251 and 423.500 to -.516.

5. 42 C.F.R. § 423.504; see also 42 C.F.R. §§ 423.401 to -.440 (setting forth the general

requirements for prescription drug plan sponsors and rules related to waiving requirements); 42

C.F.R. §§ 423.641 to -.669 (setting forth the procedures for contract determination, contract non-

renewal, and contract termination).

6. 42 C.F.R. §§423.505 to -.516.

7. 42 C.F.R. §423.100.

8. Id.

9. 42 C.F.R. § 423.104(d)-(e).



2006] HEALTH LAW 1053

equal to twenty-five percent of the actual cost of the prescription drugs. When
an enrollee's actual drug costs exceed $2250, the enrollee is responsible for

paying one hundred percent of actual drug costs up to $3600 (the "annual out-of-

pocket threshold"). After an enrollee's actual incurred drug costs exceed the

annual out-of-pocket threshold, Part D's "catastrophic" drug benefit will engage

under which the enrollee will be responsible for relatively small cost-sharing

requirements. The catastrophic cost-sharing requirements are equal to the greater
of: (1) $2 for a generic drug or preferred drug that is a multiple source drug or

$5 for any other drug; or (2) five percent of the actual drug cost.^^

Part D's catastrophic benefit will not commence until the enrollee has
actually "incurred" $3600 in actual drug costs. For these purposes, "incurred
costs" are costs that are not paid for under the Part D plan as a result of the
application of any annual deductible or other cost-sharing rules and that are paid

for by the enrollee (or on behalf of the enrollee by another person). These are the

enrollee' s "true out-of-pocket" costs, or "TrOOP." TrOOP costs may not include
any reimbursement to the enrollee through insurance, a group health plan, or

other third party payment arrangement, or any payment by another person on
behalf of the enrollee who is paying under insurance, a group health plan, or a
third party payment arrangement.^' In other words, with few exceptions, the

enrollee must actually have personally paid $3600 in drug costs before the

catastrophic coverage commences. Therefore, any amounts paid by an employer-

provided prescription drug benefit or other insurance will not count toward the

achievement of the $3600 threshold.
'^

"Basic Alternative prescription drug coverage" is prescription drug coverage

that is actuarially equivalent to the standard prescription drug benefit. However,

the basic alternative coverage may not have an annual deductible that exceeds the
deductible under standard coverage ($250 in 2006) and must have the same

10. Id, § 423.104(d). Note that the deductible, initial coverage limit, and annual out-of-

pocket threshold set forth above are for 2006 and are all subject to an annual percentage increase

for each year that is equal to the annual percentage increase in average per capita aggregate

expenditures for Part D drugs in the United States for Part D eligible individuals. The calculation
is based on data for the twelve-month period ending in July of the previous year. Id.

§ 423.104(d)(5)(iv). In addition, the Final Rule provides for premium and cost-sharing subsidies

for individuals who meet certain low-income thresholds. 42 C.F.R. §§ 423.771 to -.800. The

Social Security Administration published a final rule implementing the low-income drug subsidy

on December 30, 2005. Medicare Part D Subsidies, 70 Fed. Reg. 77,664 (Dec. 30, 2005) (to be
codified at 20 C.F.R. pt. 418). Among other things, the final rule details subsidy amounts,
eligibility, and the subsidy application process.

11. 42 C.F.R. §423.100.

12. Note that an enrollee may still count as "incurred" costs that are reimbursed through an

employer-sponsored flexible spending account, a health savings account, or a medical savings

account because these vehicles are generally funded with an enrollee's own funds. Medicare

Program; Medicare Prescription Drug Benefit, 70 Fed. Reg. 4194, 4241-42 (Jan. 28, 2005) (to be

codified at 42 C.F.R. pts. 400, 403, 411, 417, and 423).



1054 INDIANA LAW REVIEW [Vol. 39: 105

1

threshold for catastrophic coverage ($3600 for 2006).^^ If the basic alternative

prescription drug coverage meets these requirements, it may deviate from the
standard benefit by, for example, changing the cost sharing structure,

implementing different formularies, and modifying benefit limits.

In addition, PDP and MA-PD plans that offer a standard or basic alternative
plan may also offer enhanced alternative coverage to their own enrollees that
covers drugs that are excluded from the Part D program or that increases the
actuarial value of the Part D coverage such as reducing the deductible, cost-
sharing, or initial coverage limit. '"^ Enhanced alternative coverage may only be
offered by a PDP sponsor if the sponsor also offers standard or basic alternative
coverage in the service area where it is offering the enhanced alternative

coverage.*^

For both standard and alternative prescription drug coverage. PartD sponsors
are required to provide Part D enrollees access to their negotiated prices.*^
^'Negotiated prices" are prices for covered Part D drugs that are available to
beneficiaries at the point of sale at network pharmacies and that are reduced by
those discounts, direct or indirect subsidies, rebates, other price concessions, and

direct or indirect remunerations that the Part D sponsor has elected to pass
through to Part D enrollees at the point of sale (including any dispensing fees).^^
These negotiated prices must be made available to all enrollees regardless of
their applicable deductible, initial coverage limit, out-of-pocket threshold, or

amounts in excess of this threshold.'^ Part D plan sponsors must disclose to
CMS data related to their negotiated price concessions.^^

B. Eligible Individuals and Enrollment

An individual is eligible to enroll in Part D if he or she is entitled to
Medicare benefits under Part A or enrolled in Medicare Part B and lives in the
service area of a Part D plan.^^ If an individual is covered under an MA-PD that
offers prescription drug coverage, that individual must obtain their prescription

drug coverage through the MA-PD plan and may not receive the coverage
through another prescription drug plan.^' Eligible individuals may begin
enrolling in Part D during their "initial enrollment period."^^ An individual who
is first eligible to enroll in a Part D plan on or prior to January 31, 2006 has an
initial enrollment period from November 15, 2005 through May 15, 2006. An

13. 42 C.F.R. § 423.104(e) (2005)

14. M§ 423.104(f).
15. M§ 423.104(f)(2).
16. /^.§ 423.104(g).

17. 42 C.F.R. §423.100.

18. 42 C.F.R. §423. 104(g).

19. Id.

20. 42 C.F.R. § 423.30(a).

21. Id. § 423.30(b).

22. 42 C.F.R. § 423.38(a).



2006] HEALTH LAW 1055

individual who is first eligible to enroll in a Part D plan in February 2006 has an
initial enrollment period from November 15, 2005 through May 31, 2006. An
individual who first becomes eligible for Part D in March 2006 or thereafter has
the same initial enrollment period as he does under Medicare Part B.^^ Each

year, there will be an "annual coordinated election period" during which eligible

individuals may enroll in Part D or change their Part D prescription drug plan
choices for the following calendar year. That period is from November 15 to
December 3 1 of each year.^"^ In addition, an otherwise eligible individual may
also enroll or disenroll during mid-year "special enrollment periods" such as

when the individual loses other creditable prescription drug coverage, the
individual mistakenly enrolled or disenroUed because of misinformation from

other prescription drug plans or a Federal employee, or the individual moves out
of a region covered by the prescription drug plan in which he or she is enrolled.^^

If the individual fails to apply for Part D by the end of his or her initial
enrollment period for Part D and does not have other prescription drug coverage
that is "creditable coverage" for any continuous 63 day period or longer, he or

she may be subject to a late penalty paid through increased Part D premiums.^^
The higher premium is based on the number of months the individual does not
have creditable coverage. The premium is increased by one percent for each

23. Id. § 423.38(a)(lH3).

24. Id. § 423.38(b).

25. Id. § 423.38(c).

26. 42 C.F.R. § 423.46. Prescription drug coverage is "creditable coverage" for these

purposes if the actuarial value of the plan coverage equals or exceeds the actuarial value of Part D
Medicare standard prescription drug coverage. The actuarial value of a plan's prescription drug

benefit is determined through the use of generally accepted actuarial principals and in accordance

with CMS actuarial guidelines (and generally looks to expected amount ofpaid claims). 42 C.F.R.
§ 423.56(a). The basic actuarial equivalence value test is performed by determining whether the

expected plan payout on average is equivalent to or exceeds the expected plan payout of Medicare

Part D. This generally means that the prescription drug plan's expected amount of paid claims is

at least as much as the expected amount of paid claims under the standard Medicare prescription

drug benefit. Id. § 423.56. Prescription drug plans that meet the following requirements are

deemed to be "creditable coverage" without further need for actuarial analysis: (1) the plan

provides coverage for brand and generic prescriptions; (2) the plan provides reasonable access to

retail providers and, optionally, for mail order coverage; (3) the plan is designed to pay on average

at least sixty percent of participants' prescription drug expenses; and (4) the plan (i) has no annual

benefit maximum benefit or a maximum annual benefit payable by the plan of at least $25,000 or

(ii) has an actuarial expectation that the amount payable by the plan will be at least $2000 per

Medicare eligible individual in 2006. If a plan has integrated health coverage, the integrated health

plan has no more than a $250 deductible per year, has no annual benefit maximum or a maximum

annual benefit payable by the plan of at least $25,000, and has no less than a $1 million lifetime

combined benefit maximum. See CMS, Creditable Coverage Guidance (Jan. 4, 2006), http://www.

cms.hhs.gov/CreditableCoverage/Downloads/CCGuidance.pdf; CMS, Creditable Coverage

Simplified Determination, http://www.cms.hhs.gov/CreditableCoverage/Downloads/ CCSimplified

Detemiination.pdf (last visited July 2, 2006) (clarifying the "Creditable Coverage Guidance").



1056 INDIANA LAW REVIEW [Vol. 39: 1051

month without creditable coverage.^^ This increased premium will apply for as
long as the person remains enrolled in Part D and the higher premium will
increase each year because the increase will be applied to each subsequent year'

s

base premium. If the individual does have creditable coverage and fails to enroll

in Medicare Part D when he or she is initially eligible, the individual will not be
penalized. However, if the individual loses creditable coverage and experiences

a continuous period of sixty-three days or longer without creditable coverage, the

individual will be subject to the higher premium for late enrollment commencing
with the month his creditable coverage is no longer in effect.

In order for individuals to know whether they may safely waive Part D
coverage during their initial enrollment period without incurring the late penalty,

entities that offer certain types of prescription drug coverage to Part D eligible
individuals must provide written notice to those individuals about whether their

coverage is "creditable coverage."^^ Among the most common entities that must
provide this disclosure are those that sponsor employer and union group health

plans, Medigap policies, military coverage, and individual health insurance
coverage.^^ CMS has issued model notices that may be provided to Part D
eligible individuals to notify them whether an entity' s prescription drug coverage

is "creditable" or "non-creditable."^° The notice must be provided to any Part D
eligible individual who is enrolled or is seeking enrollment in the entity's
prescription drug coverage. It is permitted to be distributed with other materials

sent to the eligible individual (e.g., an employer plan' s summary plan description
or enrollment and/or renewal materials) or as a separate document. A single
notice can be provided to the covered Part D eligible individual and all Part D
eligible dependents covered under the entity's prescription drug plan. However,

a separate notice must be sent if the entity knows that the spouse and/or
dependent who are Part D eligible individuals do not live at the same address as
the covered participant. Notices must be provided at a minimum at the following
times: (1) prior to an individual's initial enrollment period for Part D; (2) prior

to the commencement of the annual coordinated election period that begins on
November 15 of each year; (3) prior to the effective date of a Part D eligible
individual's enrollment in the entity's prescription drug coverage; (4) when the
prescription drug coverage ends or changes so that it is no longer creditable

coverage; and (5) upon request by the individual.^ ^ Specified entities must also

27. 42 C.F.R. § 423.286(d)(3).

28. 42 C.F.R. § 423.56(c)-(d).

29. Id. § 423.56(b).

30. The model notices are available at CMS, Creditable Coverage Overview, http://w^ww.

cms.hhs.gov/CreditableCoverage/01_Overview.asp (last visited July 2, 2006); see also Creditable

Coverage Guidance (Jan. 4, 2006), http://www.cms.hhs.gov/CreditableCoverage/Downloads/

CCGuidance.pdf; CMS, Creditable Coverage Simplified Determination, http://www.cms.hhs.gov/

CreditableCoverage/Downloads/CCSimplifiedDetermination.pdf (last visited July 2, 2006)

(clarifying the "Creditable Coverage Guidance").

31. CMS, Creditable Coverage Overview, http://www.cms.hhs.gov/CreditableCoverage/

01_Overview.asp (last visited July 2, 2006).



2006] HEALTH LAW 1057

provide notice to CMS of whether their prescription drug coverage is creditable
through an on-line disclosure form.^^

In general, the effective date of coverage for a newly enrolled individual is

the first day of the month that the individual is entitled to Part A or enrolled in
Part B, if the Part D enrollment is made before the person is entitled to Part A or
enrolled in Part B. If Part D enrollment is made after that time, then coverage is
generally effective on the first day of the month after the Part D enrollment is
made.^^ Enrollment made during an annual coordinated election period is
effective as of the first day of the next calendar year; however, enrollments made
from January 1, 2006, through May 15, 2006, are effective as of the first day of
the calendar month following the month in which the Part D enrollment is
made.^"^

C Access to Pharmacies and Drugs
Part D plans are subject to a number of requirements to ensure that enrollees

have adequate access to the drugs they need and pharmacies at which they may
obtain the drugs. In general, a Part D plan must establish a network of retail
pharmacies sufficient to ensure that ninety percent of enrollees in an urban area

served by the Part D plan live within two miles of a network pharmacy, ninety
percent of enrollees in a suburban area live within five miles of a network

pharmacy, and seventy percent ofenrollees in rural areas live within fifteen miles

of a network pharmacy.^^ Other regulations require adequate access to non-retail

pharmacies (e.g., mail-order and institutional pharmacies); home infusion
pharmacies; long-term care pharmacies; and pharmacies operated by the Indian

Health Service, an Indian tribe or tribal organization, or an urban Indian

organization.^^ Part D plans must also allow enrollees to obtain any benefit
offered under the plan at a retail pharmacy—although the Part D plan may charge
higher cost-sharing at the retail pharmacy.^^ This requirement is most significant

when an enroUee wants to obtain a ninety-day supply of a drug. In many non-
Part D prescription drug plans (such as an employer group health plan), ninety-
day drug supplies are only available through a mail-order pharmacy. Part D
plans are required to offer these extended supplies through retail outlets

also—although the plan may charge more if the prescription is filled at a retail
outlet.^^ Plans must also ensure access to Part D drugs at out-of-network
pharmacies when an enroUee cannot reasonably be expected to obtain such drugs
at a network pharmacy and the enroUee does not access Part D drugs at an out-of-

32. See CMS, Disclosure to CMS Guidance (Jan, 10, 2006), http://www.cms.hhs.gov/
CreditableCoverage/Downloads/Disclosure2CMSGdnc.pcif.

33. 42 C.F.R. § 423.40(a) (2005).

34. Id. § 423.40(b).

35. 42 C.F.R. § 423.120(a)(l)(i)-(iii).

36. /^. §423.120(a)(3)-(6).-

37. Id. §423.120(a)(10).

38. Id.



1058 INDIANA LAW REVIEW [Vol. 39: 1051

network pharmacy on a routine basis (including access to vaccines through a
physician's office).^^ A plan may require the enrollee to assume a greater
financial responsibility for drugs obtained at an out-of-network pharmacy

."^^

Part D plans may also create formularies (selected drugs that are exclusively
covered by the plan or that are offered at a lower cost or cost-sharing

requirement); however, CMS's Final Rule provides limits on a Part D plan's
discretion to limit drugs in the formulary."^' Formularies may only be developed
and revised by a Part D plan's pharmacy and therapeutic committee—the
membership of which is prescribed by the Final Rule."^^ A plan' s formulary must
include, within each therapeutic category and class of Part D drugs, at least two
Part D drugs that are not therapeutically equivalent and bioequivalent, with
different strengths and dosage forms available for each of those drugs."^^

However, only one Part D drug needs to be included if the particular category or
class includes only one Part D drug. In addition, only one Part D drug needs to
be included for a particular category or class if the Part D plan can demonstrate
(and CMS concurs) that only two drugs are available in that category or class and
that one drug is clinically superior to the other drug."^ Finally, a Part D plan must
include adequate coverage of the types of drugs most commonly needed by Part
D enrollees, as recognized in national treatment guidelines."^^

A Part D plan may not remove a drug from the formulary without providing
notice to CMS and other relevant entities sixty days prior to the removal."^^ In
addition, the Part D plan must either: ( 1 ) provide direct written notice to affected
enrollees at least sixty days before the effective date of the change or (2) provide

the affected enrollee with a sixty-day supply of the drug the next time that the

enrollee requests a refill and provide the enrollee with the removal notice at that

time."^^ The regulation sets forth the content requirements of enrollee notices.
"^^

Drugs may be removed from the formulary immediately if deemed unsafe by the
Food and Drug Administration, as long as retrospective notice is provided to
affected enrollees, CMS, and other relevant entities."^^ Except for changes
required by the FDA, no changes may be made during the period between
November 15 and sixty days after the beginning of the new plan year.^^

The Part D Final Rule also requires that information be provided to enrollees
and that enrollees' information remain confidential. A Part D sponsor must

39. 42 C.F.R. §423.124.

40. Id.

41. 42 C.F.R. §423. 120(b).

42. Id. § 423.120(b)(1).

43. Id §423.120(b)(2)(i).

44. Id. §423.120(b)(2)(ii).

45. M. §423.120(b)(2)(iii).

46. M§423.120(b)(5)(i).

47. Id.

48. M §423.120(b)(5)(ii).
49. M§423.120(b)(5)(iii).

50. Id. § 423.120(b)(6).



2006] HEALTH LAW 1059

provide enrollees with information about the plan's service area, benefits, cost-

sharing, formulary list, procedures to request formulary exceptions, access, out-

of-network coverage, grievance and appeals procedures, quality assurance

policies, and other information.^' Pharmacies are required to inform enrollees of

the price differential between a brand name Part D drug and its generic
equivalent. The notice must be provided at the point of sale when the drug is
dispensed (or at the time of the delivery of a mail-order drug).^^ Finally, the

regulations require PDP sponsors to ensure that they abide by all applicable
medical privacy laws and have procedures that specify for what purposes

information will be used within the organization and when it may be disclosed
outside of the organization. Enrollee records must be maintained in an accurate

and timely manner and enrollees must have timely access to the records and
information that pertain to them.^^

D. Cost and Quality Control

The Final Rule requires Part D plans to institute certain cost control and
quality improvement initiatives. Specifically, Part D plans must institute drug
utilization management programs, quality assurance measures, and a medication
therapy management program that targets medication use by individuals with
chronic diseases who are likely to incur substantial annual drug costs due to use
of multiple Part D drugs.^"^ Part D sponsors are required to support and comply
with electronic prescription standards relating to covered Part D drugs for Part
D enrollees based on standards published by CMS on November 7, 2005.^^ Plan
D sponsors may be deemed to comply with a number of the requirements of the
Final Rule if they are accredited by a private, national accreditation organization
approved by CMS.^^ The requirements for which deemed status can be obtained
are the following: those relating to access to covered drugs, drug utilization

management programs, quahty assurance measurements and systems, medication
therapy management programs, programs to control fraud, abuse, and waste, and
privacy requirements.^^ CMS may remove deemed status if it determines the
sponsor does not actually meet the requirements.^^ Deemed entities must submit

51. 42 C.F.R. § 423.128; see also 42 C.F.R. §§ 423.560 to -.638 (setting forth detailed

provisions related to the grievance, coverage determination, and appeals processes required to be

implemented by Part D plan sponsors).
52. 42 C.F.R. § 423.132. Note that certain waiver provisions may apply to this notice

requirement. Id.

53. 42 C.F.R. §423.136.

54. 42 C.F.R. §423.153.

55. 42 C.F.R. § 423.159; see also Medicare Program; E-Prescribing and the Prescription

Drug Program, 70 Fed. Reg. 67,568 (Nov. 7, 2005) (to be codified at 42 C.F.R. pt. 423).

56. 42 C.F.R. § 423. 165 (2005). The standards and procedures for applying for approval to

become a recognized accreditation organization are at 42 C.F.R. §§ 423.168 and 423.171.

57. 42 C.F.R. §423. 165(b).

58. M§ 423.165(e).



1060 INDIANA LAW REVIEW [Vol. 39: 105

1

to CMS their accreditation surveys and authorize the accreditation organization
to release survey information to CMS (including the Part D sponsor's corrective
action plans).^^

E. Compensation to Part D Plans

Part D plans are compensated for providing the Part D benefits and incurring
the risk of providing those benefits through a number of mechanisms. Subpart
G of the Final Rule "sets forth rules for the calculation and payment of CMS
direct and reinsurance subsidies for Part D plans; the application ofrisk corridors
and risk-sharing adjustments to payments; and retroactive adjustments and

reconciliations to actual enrollment and interim payments."^° Payments to

sponsors are made from CMS's Medicare Prescription Drug Account.^^ CMS
provides Part D plans "advance monthly payments equal to the Part D plan's
standardized bid, risk adjusted for health status," minus the monthly enrollee

premiums.^^ It also provides reinsurance subsidies on a monthly basis "based on

either estimated or incurred allowable reinsurance costs . . . and final

reconciliation to actual allowable reinsurance costs."^^ CMS provides "payments
for premium and cost sharing subsidies, including additional coverage above the
initial coverage limit, on behalf of certain [low-income] individuals."^"^ Lump
sum or monthly adjustments may be made "based on the relationship of the Part
D plan's adjusted allowable risk corridor costs to predetermined risk corridor
thresholds in the coverage year."^^ Finally, each year "CMS reconciles payment
year disbursements with updated enrollment and health status data, actual low-

income cost-sharing costs," and actual allowable reinsurance costs and may make
retroactive adjustments if necessary.^^ The Final Rule details the calculation of
all of the foregoing payments and prevents any State or local governmental

authorities from imposing any premium tax, fee, or other similar assessment on
these payments.^^ Any payment to a Part D sponsor is conditioned upon the
sponsor providing information to CMS that is necessary to determine payment
or that is required by law.^^ The Final Rule provides a payment appeals process
for reconsideration of "reconciled health status risk adjustments of the direct

59. M§ 423.165(d).
60. 42 C.F.R. §423.301.

61. 42 C.F.R. §423.3 15(a).

62. M§ 423.315(b).
63. /^.§ 423.315(c).

64. M.§ 423.315(d).

65. M.§ 423.315(e).

66. /J. §423.3 15(f).

67. See 42 C.F.R. § 423.329 (referring to monthly payments, reinsurance subsidies, and low-

income subsidies); 42 C.F.R. § 423.336 (referring to risk-sharing arrangements); 42 C.F.R. §

423.343 (referring to annual retroactive adjustments and reconciliations); see also 42 C.F.R. §

423.440(b) (referring to prohibition of state imposition of premium taxes).

68. 42 C.F.R. § 423.322; 42 C.F.R. § 423.159.



2006] HEALTH LAW 1061

subsidy, . . . reconciled reinsurance payments, . . . reconciled final payments

made for low-income cost sharing subsidies . . . and [final risk-sharing
payments].

"^^

F. Sanctions

CMS may impose defined intermediate sanctions for certain violations
committed by Part D sponsors7^ The following violations may result in
sanctions:

(1) fail[ing] substantially to provide, to a Part D plan enrollee, medically
necessary services that the organization is required to provide (under law

or . . . contract) to a Part D plan enrollee [when] that failure adversely
affects (or is substantially likely to adversely affect) the enrollee[;] (2)

impos[ing] on Part D plan enrollees premiums in excess of the monthly
basic and supplemental beneficiary premiums permitted [by the Social

Security Act and the Final Rule;] (3) act[ing] to expel or refus[ing] to

reenroll a beneficiary in violation of the [Final Rule;] (4) engag[ing] in

any practice that may reasonably be expected to have the effect of
denying or discouraging enrollment of individuals whose medical
condition or history indicates a need for substantial future medical

services[;] (5) misrepresent[ing] or falsify[ing] information fumishe[d

to CMS or an] individual or . . . other entity under the Part D drug
benefit program[; or] (6) employ[ing] or contract[ing] with an individual

or entity who is excluded from participation in Medicare ... for the
provision of . . . [h]ealth care[, u]tilization review[, m]edical social

work[, or a]dministrative services.^^

Sanctions for violations may be imposed only after observing detailed
procedures set forth in the Final Rule, and the sanctions may include one or more
of the following:

( 1 ) [c]ivil money penalties ranging from $ 1 0,000 to $ 1 00,000 depending
upon the violation[;] (2) [s]uspension of enrollment of Medicare
beneficiaries [;] (3) [s]uspension of payment to the Part D sponsor for
Medicare beneficiaries who enroll[; or] (4) [s]uspension of all Part D
plan marketing activities to Medicare beneficiaries for the Part D plan
subject to the intermediate sanctions.

^^

The sanctions may remain in place "until CMS is satisfied that the deficiency on

69. 42 C.F.R. § 423.350(a). The remainder of 42 C.F.R. § 423.350 provides detailed

information regarding the reconsideration process, including the content of a request for

reconsideration, an informal written reconsideration process, a hearing right, and a review by the

CMS Administrator. See id. § 423.350(b)-(d).
70. 42 C.F.R. § 423.752(a).

71. Id.

72. 42 C.F.R. § 423.750(a)(l)-(4).



1062 INDIANA LAW REVIEW [Vol. 39: 105

1

which the determination was based is corrected and is not likely to recur."^^

G. Retiree Prescription Drug Plan Subsidy

Recognizing that the implementation of the Part D benefit might encourage
employers to terminate their retiree prescription drug plans, the Final Rule allows

for the payment of a subsidy to employment-based retiree health plans that
provide "qualifying covered retirees" with prescription drug coverage that is

"actuarially equivalent" to the standard Part D drug benefit.^"^ A "qualifying
covered retiree" is a Part D eligible individual who is a participant (or the spouse
or dependent of the participant) in the employment-based retiree health plan that

provides "actuarially equivalent" prescription drug benefits who is not enrolled
in a Part D plan7^ These plan sponsors may not collect a subsidy for retirees
who enroll in Part D (regardless of whether the retiree also participates in the
retiree plan)7^ For each "qualifying covered retiree" the sponsor of the retiree

plan is eligible for a subsidy in the amount of twenty-eight percent of the
allowable retiree cost for covered Part D drugs in the plan year for such retiree
attributable to the gross retiree costs between the cost threshold ($250 in 2006)
and the cost limit ($5000 in 2006)7^ Drug costs for qualifying covered retirees
incurred by the retiree plan below $250 and above $5000 are not considered
when calculating the twenty-eight percent subsidy7^

To receive the subsidy, the employment-based retiree drug plan must provide
prescription drug coverage that is "actuarially equivalent" to the standard Part D
prescription drug benefit.^^ In general, actuarial equivalence is a measure of

whether the retiree drug plan provides benefits that are on average for all

participants at least as valuable as the standard Part D drug benefit.^^ Actuarial

73. M § 423.750(b).
74. 42 C.F.R. §§ 423.880 to -.894.

75. 42 C.F.R. § 423.882.

76. Id.

11. 42 C.F.R. § 423.886.

[Gjross retiree costs means, for a qualifying covered retiree who is enrolled in a

qualified retiree prescription drug plan, . . . non-administrative costs incurred under the

plan for Part D drugs during the year, whether paid for by the plan or the retiree,
including costs directly related to the dispensing of Part D drugs.

42 C.F.R. § 423.882. The cost threshold and cost limits are adjusted annually in the same manner

as the annual Part D deductible and the annual PartD out-of-pocket threshold are adjusted annually.
42 C.F.R. § 423.886(b)(3); see also supra note 10.

78. 42 C.F.R. §423.886(b)(l)-(2).

79. 42 C.F.R. § 423.884(d).

80. Actuarial equivalence is achieved if the retiree plan's "gross value" and "net value" are

"at least equal to the actuarial" gross and net values of the standard Part D drug benefit. Id. §
423.884(d)(l)-(2). Gross value under the retiree plan "is determined using the actual claims

experience and demographic data for Part D eligible individuals who are participants and
beneficiaries in the [retiree] plan." Id. § 423.884(d)(5)(ii)(A). Net value under the retiree plan is



2006] HEALTH LAW 1063

equivalence must be certified "by a qualified actuary who is a member of the
American Academy of Actuaries" and submitted through an on-line subsidy
application process "no later than ninety days prior to the beginning of the plan

year" to which the subsidy will apply. ^' Applicants for the retiree drug subsidy

must provide ongoing updates on the participation of qualified covered retirees^^

and may receive subsidy payments on a monthly, quarterly, or annual basis.^^

n. F^AUD AND Abuse

A. Gainsharing

The debate over hospital-physician gainsharing arrangements revived in
2005.^"^ Gainsharing had fallen into disuse following an unequivocally negative

1999 Special Advisory Bulletin ofthe Department ofHealth and Human Services
("HHS") Office ofInspector General ("OIG").'^ In the Bulletin, OIG warned that
then-current gainsharing practices violated the Civil Monetary Penalties ("CMP")
statute^^ which prohibits any "payment, directly or indirectly, to a physician as

an inducement to reduce or limit services" to Medicare or Medicaid beneficiaries

who are under the direct care of the physician. ^^ OIG also warned that
gainsharing arrangements violated the Anti-Kickback statute^^ which prohibits

remuneration in return for patient referrals.^^

"determined by reducing the gross value of the coverage by the expected premiums paid by Part D
eligible individuals who are plan participants or their spouses and dependents." Id. §
423.884(d)(5)(ii)(B).

81. Id. §§ 423.884(c)(5), (d)(2). Applications for the retiree drug subsidy may be made at

CMS, Retiree Drug Subsidy Program, at http://rds.cms.hhs.gov/ (last visited July 2, 2006).

82. Id. § 423.884(c)(6).

83. 42 C.F.R.§ 423.888(b)(1).

84. "While there is no fixed definition of a 'gainsharing' arrangement, the term typically

refers to an arrangement in which a hospital gives physicians a percentage share of any reduction

in the hospital's costs for patient care attributable in part to the physicians' efforts." Department

ofHealth and Human Services, Office ofInspector General, Special Advisory Bulletin: Gainsharing

Arrangements and CMPs for Hospital Payments to Physicians to Reduce or Limit Services to
Beneficiaries (July 1999), avaz/aMe a? http://oig.hhs.gov/fraud/docs/alertsandbulletins/gainsh.htm.

85. Id.

86. Id.\ 42 U.S.C. § 1320a-7a (2000).

87. 42 U.S.C. § 1320a-7a(b)(l).

88. See sources cited supra note 84; 42 U.S.C. § 1320a-7b.

89. 42 U.S.C. § 1320a-7b(b)(l)(A). Gainsharing arrangements also potentially implicate the

Stark law prohibition on self referrals. 42 U.S.C. § 1395nn. OIG expressed no opinion on this

issue, because the law fell outside its advisory opinion authority. See, e.g.. Op. Dep't of Health &
Human Servs., OIG No. 05-01, 6-7 (Jan. 28, 2005) [hereinafter Advisory Opinion No. 05-01],

available at http://oig.hhs.gov/fraud/docs/advisoryopinions/2005/ao0501.pdf. Similarly, OIG

expressed no opinion on the application of the Internal Revenue Service's regulations governing

private inurement and private benefit issues for nonprofit hospitals. Id. at 7 n.8; see 26 U.S.C. §



1064 INDIANA LAW REVIEW [Vol. 39: 105

1

Current gainsharing issues arise most frequently in surgical settings.

Examples include policies which reward the substitution of less costly surgical

items or the opening of sterile supplies only on an "as-needed" basis. A January
18, 2001, advisory opinion, in which OIG dechned to take enforcement action
against a surgical cost-saving arrangement, attracted little attention at the time.^^

Beginning on January 28, 2005, OIG issued six advisory opinions concerning
various gainsharing proposals. The approved arrangements included policies
which rewarded "practices to curb the inappropriate use or waste of medical

supplies" in cardiac surgery,^' and the use of standardized supplies in cardiac

catheterization laboratories.^^ The advisory opinions concluded that each
proposed arrangement constituted a potential violation of the CMP law and the
Anti-Kickback statute. However, since the proposals contained safeguards to

minimize the potential for abuse, OIG announced that it would not impose
sanctions against the requester of the opinion.^^

With respect to the CMP law, OIG identified eight factors militating against
sanctions.

^"^
First, each proposed arrangement clearly and separately identified

the specific cost saving action to be implemented and the resulting savings.
^^

This "allow[ed] for public scrutiny and . . . physician accountability for any

adverse effects."^^ Second, the requesters provided "credible medical support for

the position that implementation of the recommendations [would] not adversely

affect patient care."^^ Third, the proposed incentive payments were for services

"not disproportionately performed on . . . program beneficiaries [and were]

calculated [based] on the hospital's actual out-of pocket . . . costs."^^ Fourth, the

proposals used objective data to establish the historical frequency of the

501(c)(3), Rev. Rul. 69-383, 1969-2 C.B. 113.

90. Op. Dep't of Health & Human Servs., OIG No. 01-01 (Jan. 11, 2001), available at
http://oig.hhs.gov/fraud/docs/advisoryopinions/200 1/aoO 1-01 .pdf

.

91. Advisory Opinion No. 05-0\y supra note 89, at 3; see also Op. Dep't of Health & Human
Servs., OIG No. 05-03 (Feb. 10, 2005), available at http://oig.hhs.gov/fraud/docs/

advisoryopinions/2005/ao0503.pdf; Op. Dep't of Health & Human Servs., OIG No. 05-06 (Feb.
18, 2005), available at http://oig.hhs.gov/fraud/docs/advisoryopinions/2005/ao0506.pdf.

92. Op. Dep't of Health & Human Servs., OIG No. 05-02 (Feb. 10, 2005), available at
http://oig.hhs.gov/fraud/docs/advisoryopinions/2005/ao0502.pdf; Op. Dep't of Health & Human
Servs., OIG No. 05-04 (Feb. 10, 2005), available at http://oig.hhs.gov/fraud/docs/

advisoryopinions/2005/ao0504.pdf; Op. Dep't of Health & Human Servs., OIG No. 05-05 (Feb.
18, 2005), available at http://oig.hhs.gov/fraud/docs/advisoryopinions/2005/ao0505.pdf.

93. Advisory Opinion No. 05-01, supra note 89, at 8. OIG did conclude that "open as

needed" policies for surgical tray items did not run afoul of the CMP statute because the
"insubstantial time" required to open them did not constitute a reduction or limitation of services.

Id.

94. Id.

95. Id.

96. Id.

97. Id.

98. /J. at 8-9.



2006] HEALTH LAW 1065

procedures involved.^^ The data were used to establish maximum thresholds
beyond which savings would not be shared with the physician. '^° Fifth, in the

case ofproduct standardization incentives, the arrangements did not unduly limit

the selection of cardiac devices available to the physician.'^* Sixth, the hospital

and physician will disclose the arrangement to patients in writing. '°^ Seventh,

"the financial incentives [were] reasonably limited in duration and amount."'^^

Eighth, payments were to be made by the hospital to the physician or surgeon's
practice group to be distributed on a per capita basis, not to the individual

physician.
^^"^

With respect to the Anti-Kickback statute, OIG concluded that the "safe
harbor" for personal services and management contracts '^^ did not apply to the
arrangements, because the percentage payment did not meet the "set in advance"

requirement. ^^^ However, OIG concluded that the incentive payments did not
appear to be based on a prohibited intent to induce referrals, or present a risk of

overutilization, for three reasons. '^^ First, participation in each program was
limited to surgeons or cardiologists already members ofthe participating practice
group, potential savings were capped based on the prior year's admissions, and

the hospital's contract with the practice group was limited to one year.^^^
Second, the participating practice groups did not include other nonparticipating

physicians or surgeons. '^^ The per capita distribution method "mitigat[ed] any
incentive for an individual [participant] to generate disproportionate cost

savings."^ ^^ Third, each proposal specifically set out the particular actions that

would generate cost savings.^ ^^ Although the measures appeared to present

minimal patient risk, the physician would shoulder any liability burden.
'^^

The
proposals appeared to reasonably compensate the physician for the exposure.*'^

Notwithstanding the tension between the advisory opinions and the 1999

Special Advisory Bulletin, OIG emphasized that the former do not represent a
policy change. Each advisory opinion contained such a disclaimer.*'"^ OIG

99. Mat 9.
100. Id.

101. Id.

102. Id.

103. Id.

104. Mat 8-9.
105. 42C.F.R.§ 1001.952(d) (2005).

106. Advisory Opinion 05-01, supra note 89, at 1 1.

107. Id. 2X12.

108. Id.

109. Id.

110. Id.

111. Id.

112. Id.

113. Id.
'

1 14. See, e.g., id. at 9-10 (noting that "[t]he Proposed Arrangement is markedly different from

many "gainsharing" plans, particularly those that purport to pay physicians a percentage of



1066 INDIANA LAW REVIEW [Vol. 39: 105

1

further reiterated its position in congressional testimony by OIG Chief Counsel
Lewis Morris.' ^^ However, Morris pointed to a distinction between so-called

"black box" gainsharing typical of earlier practices and the arrangements

described in the 2005 advisory opinions.''^ Morris characterized "black box"
gainsharing as "arrangements that give physicians money for overall cost-savings
without knowing what specific actions the physicians are taking to generate those
savings."''^ Morris testified that, in "evaluating a particular . . . program, OIG
. . . generally focuse[s] on three areas: accountability, quality controls, and

safeguards against payments for referrals."''^ Morris warned that "any broad

reading of the [advisory] opinions should be done with caution. Different cost-

saving measures or different payment structures could have produced different
results."''^ Clearly, the 2005 advisory opinions represent only the beginning of

the renewed gainsharing debate.
'^^

B. Recent Court Decisions Under the False Claims Act ( '*FCA ")
121

1. Causing the Submission of a False Claim.—In United States ex rel.
Schmidt v. Zimmer, Inc.,^^^ the Third Circuit applied tort law concepts of

intervening and superseding cause to a qui tam action against Zimmer, a
manufacturer of orthopedic implants. Zimmer contracted with a purchasing
agent to supply implants to a group of participant hospitals. *^^ According to the

complaint, the contract provided for a discount on each implant once the number
of implants ordered by the participant exceeded the number ordered the year

generalized cost savings not tied to specific, identifiable cost-lowering activities").

115. Gainsharing Arrangements: Hearing on Oct. 7, 2006 Before the Subcomm. on Health

ofthe H. Comm. on Ways and Means, 109th Cong. 1-4 (2005) (statement of Lewis Morris, Chief

Counsel, U.S. Department of Health and Human Services Office of Inspector General), available

at http://oig.hhs.gov/testimony/docs/2005/Gainsharing 1 0-07-05 .pdf.

116. Id.

117. Id. at 3.

118. Id.

119. Mat 4.
120. See Hospital Fair Competition Act of 2005, S. 1002, 109th Cong. (2005) (having been

sponsored by Senators Grassley and Baucus and proposing to authorize certain "coordinated care

arrangements between hospitals and physicians," meaning gainsharing arrangements).

121. 31 U.S.C. §§ 3729-3733 (2000). The FCA authorizes the United States to bring a civil
action against persons who, among other things, knowingly present a false or fraudulent claim to

the government. Id. § 3729(a). If found liable, the defendant must pay three times the actual

damages suffered by the government, plus a civil penalty of $5500 to $1 1,000 per claim. Id. So-

called qui tam provisions permit, with certain limitations, a private citizen known as a "relator" to

commence an FCA suit on behalf of the government, in which the United States Department of
Justice may elect to intervene. Id. § 3730(b)(1). If the suit is successful, the relator may receive

between fifteen to thirty percent of the government's recovery. Id. § 3730(d).

122. 386 F.3d 235 (3d Cir. 2004).

123. /^. at 237.



2006] HEALTH LAW 1067

before. Also, each participant allegedly would receive a two percent bonus on

implant purchases if it met preset market share and volume purchase

commitments.

The complaint alleged that Medicare cost reports filed by the participants

failed to disclose the rewards the participant received from Zimmer. This

allegedly violated the certification contained on the cost report form, which

required the entity submitting the report to certify that the costs submitted were

true and correct. The complaint alleged violations of the Anti-Kickback Statute
and the Stark self-referral ban,^^"^

Zimmer argued that it did not file cost reports and had no reason to know
what the hospitals' reports would contain and thus did not "cause" the hospitals

to submit false reports. The district court granted Zimmer' s motion to dismiss.
The Third Circuit reversed, holding that the complaint sufficiently alleged that
Zimmer "pursued a marketing scheme that it knew would, if successful, result in
the submission by [the hospitals] of compliance certifications required by

Medicare that Zimmer knew would be false."'^^ The panel specifically applied

ordinary causation principles from negligence law in determining

responsibility under the FCA. Under those principles, the "intervention
of a force which is a normal consequence of a situation created by the

actor's . . . conduct is not a superseding cause of harm which such
conduct has been a substantial factor in bringing about."^^^

Thus, even if the hospitals' allegedly false certifications were an unlawful

act, they did not absolve Zimmer from responsibility as a superseding cause. ^^^

The doctrine did not apply because the complaint alleged that Zimmer "realized
or should have realized the likelihood" that false certifications would be made
as a part of the discount arrangement.*^^

2. Displacement of Common Law Remedies.—In United States v. Lahey
Clinic Hospital Inc.,^^^ the United States sued to recover alleged Medicare Part

B overpayments. The complaint alleged common law theories of unjust
enrichment and payment under mistake of fact. The government invoked subject
matter jurisdiction under 28 U.S.C. § 1345, the general "United States as

plaintiff" jurisdictional statute.

The First Circuit rejected the defendant's argument that the United States
could only recover overpayments through the administrative process established

under the Medicare Act.*^^ It also rejected the contention that the Act implicitly

repealed section 1345 and displaced underlying common law causes of action to

124. See supra notes 88-90 and accompanying text.

125. Zimmer, 386 F.3d at 244.

126. Id. (omission in original) (quoting RESTATEMENT (SECOND) OFTorts § 443).

127. M. at 244-45.

128. See id. at 245 nM.
129. 399 F.3d 1 (1st Cir.), cert, denied, 126 S. Ct. 339 (2005).

130. See 42 U.S.C. § 405 (g)-(h) (2000); see also 42 U.S.C. § 1395.



1068 INDIANA LAW REVIEW [Vol. 39:1051

recover overpayments.'^' "In the context of recovery of overpayments, the

government has broad power to recover monies wrongly paid from the Treasury,
even absent any express statutory authorization to sue."'^^

3. Materiality ofFalse Statement.—In United States ex rel. A+Homecare,
Inc. V. Medshares Management Group, Inc.,^^^ the Sixth Circuit joined other
circuits'^"* in holding that a false claim or statement must be "material" to support

an action under the FCA.'^^ The panel adopted the "natural tendency" standard
articulated by the Supreme Court. '^^ "[A] false statement is material if it has a
natural tendency to influence, or [is] capable of influencing, the decision of the

decisionmaking body to which it was addressed."'^^ Under this standard, a false
accrual entry for pension expense on a cost report was material, even though it

was disallowed by the fiscal intermediary.'^^ "A party cannot file a knowingly
false claim on the assumption that the fiscal intermediary will correctly calculate

the value in the review process."
'^^

4. FCA Pleading Requirements.—PCA claims, being a species of fraud,
must be pleaded with particularity.'"^^ In United States ex rel. Gross v. AIDS
Research Alliance-Chicago,^"^^ the relator, a participant in a research study of an

off-label investigational new drug for the treatment ofAIDS, alleged various acts
of negligence, mismanagement, and poor oversight of the study. This allegedly

caused the defendants "to be noncompliant with a laundry list of federal

regulations . .
.

, various study protocols, and 'Good Clinical Practices. '"'"^^ The
complaint alleged that the defendants submitted various study reports to the

government, but did not allege what the contents of the reports were, nor what

if any, relation the reports bore to grant payments.

The Seventh Circuit observed that the "fraudulent statement's purpose must

131. Lahey, 399 F3d at 15.

1 32. Id. Query whether, in electing to bypass the administrative process and sue on a common

law unjust enrichment theory, the government risks exposure to common law-based counterclaims

arising out of alleged underpayments. Cf. United States v. Royal Geropsychiatric Servs., Inc., 8 F.

Supp. 2d 690 (N.D. Ohio 1998) (dismissing provider's counterclaim for declaratory judgment in

FCA suit for failure to exhaust administrative remedies).
133. 400 F.3d 428 (6th Cir.), cert, denied, 126 S. Ct. 797 (2005).

134. United States v. Southland Mgmt. Corp., 326 F.3d 669, 679 (5th Cir. 2003); United

States ex rel Costner v. URS Consultants, Inc., 317 F.3d 883, 887 (8th Cir. 2003); Luckey v.
Baxter Healthcare Corp., 183 F.3d 730, 732-33 (7th Cir. 1999); United States ex rel. Berge v. Bd.

of Trs., 104 F.3d 1453, 1459 (4th Cir. 1997); United States v. TDC Mgmt. Corp., 24 F.3d 292, 298
(D.C. Cir. 1994).

135. Medshares, AmV.MaiUl.
136. Id. at 445; see also Neder v. United States, 527 U.S. 1, 20-22 (1999).

137. Medshares, 400 F.3d at 445 (second alteration in original) (citation omitted).

138. See id. at447n.l3.

139. Id. at 441.

140. Fed. R. Civ. P. 9(b).

141. 415 F.3d 601 (7th Cir. 2005).

142. Mat 603.



2006] HEALTH LAW 1069

be to coax a payment ofmoney from the government." '"^^ The panel held that the
complaint alleged nothing more than that all of the reports and filings, taken

together, constituted false certifications of compliance with applicable

regulations. "These conclusory allegations shed no light on the nature or content

of the individual forms or why any particular false statement would have caused
the government to keep the funding spigot open, much less when any payments
occurred or how much money was involved." ^'^'^ The complaint was also
deficient for failing to allege that any particular certification of regulatory

compliance was a condition of payment.
''^^

5. FCA Claims Based on Violation ofAnti-Kickback Statute.—In United
States ex rel. McNutt v. Haleyville Medical Supplies, Inc.,^^^ the United States
intervened in a qui tam action based upon alleged kickbacks made by various
medical services companies to pharmacists, respiratory therapists, and a doctor's

patient representative. The complaint alleged that the defendants disguised the
kickbacks as rental payments and commissions. ^"^^ The district court denied a
motion to dismiss and certified a very straightforward issue for interlocutory

appeal: "[W]hether a violation of the Anti-Kickback statute . . . can form a basis

for a[n FCA] claim." ^"^^ The Eleventh Circuit affirmed. Asserting that
compliance with the Anti-Kickback statute was a condition of payment of a
Medicare claim, the panel held that a claim arising from a kickback was not

eligible for payment. A claim for payment under those circumstances was one
"for which payment is known by the claimant not to be owed" and is therefore
false.

1'^

C. New Indiana False Claims and Whistleblower Protection Act

In 2005 the Indiana General Assembly enacted the False Claims and

Whistleblower Act^^^ patterned after the federal version*^^ and those adopted in

other states. Although the Act is too new to have generated precedent, it will
clearly affect future enforcement of alleged fraud and abuse violations at the state

level.

The Act applies to false claims against the state, defined as "Indiana or any
agency of state government." The term "State" expressly excludes political
subdivisions. ^^^ It specifically "does not apply to a claim, record, or statement

143. M. at 604.

144. Mat 605.
145. Id.

146. 423 F.3d 1256 (11th Cir. 2005).

147. Mat 1258.
148. Mat 1258-59.
149. M. at 1259.

150. Pub. L. No. 222-2005 § 23; IND. CODE § 5-1 1-5.5-1 (2005).

151. 31 U.S.C. §§ 3729-3730(h) (2000).

152. IND.C0DE§ 5-11-5.5-1(6).



1070 INDIANA LAW REVIEW [Vol. 39: 105

1

concerning income tax" under Indiana Code section 6-3.^^^ The Act applies to
one

who knowingly or intentionally: (1) presents a false claim to the state
for payment or approval; (2) makes or uses a false record or statement

to obtain payment or approval of a false claim . . . ; (3) with intent to

defraud . .
.

, delivers less money or property to the state than the amount
recorded on the certificate or receipt the person receives from the state;

(4) with intent to defraud the state, authorizes issuance of a receipt

without knowing that the information on the receipt is true; (5) receives
public property as a pledge of an obligation on a debt from an employee

who is not lawfully authorized to sell or pledge the property; (6) makes
or uses a false record or statement to avoid an obligation to pay or

transmit property to the state; [or] (7) conspires with another person[, or

causes another person to violate the statute].
^^"^

Violators are liable for a "civil penalty of at least five thousand dollars ($5,000)

and for up to three (3) times the amount of damages sustained by the state."
^^^

The Attorney General and Inspector General*^^ have concurrent investigative
jurisdiction. ^^^ If the Attorney General discovers a violation, that office may
initiate suit. If the Inspector General discovers a violation, that office must first

certify the finding to the Attorney General. If the Attorney General declines to

act, the Inspector General may proceed. '^^

The Act contains qui tam provisions similar to the federal version. A private
citizen (referred to in federal parlance as a "relator") may initiate a civil lawsuit
against a violator. Once an action is filed, no person other than the Attorney
General or Inspector General may bring another action based on the same facts. ^^^

The Attorney General or Inspector General may intervene in the action and
thereafter control the prosecution.

^^^

The Attorney General or Inspector General may move to dismiss the action
on motion for cause shown, ^^^ or may seek dismissal in order to permit pursuit
of the claim through an administrative proceeding, "including an administrative

proceeding or a proceeding brought in another jurisdiction" which presumably

includes a federal proceeding.
'^^

If the state prevails, the relator may receive a share of the state's recovery.

153. /J. §5-ll-5.5-2(a).

154. M §5-ll-5.5-2(b).
155. Id.

156. The same statute, Pub. L. No. 222-2005, § 14, legislatively created the Office ofInspector

General.

157. IND. Code § 5-1 l-5.5-3(a).

158. Id. § 5-ll-5.5-3(bHc), (e).

159. /rf. §5-ll-5.5-4(g).

160. M§5-ll-5.5-5(a).

161. M§5-ll-5.5-4(b).

162. /^. §5-ll-5.5-5(h).



2006] HEALTH LAW 1071

together with reasonable attorney' s fees and an amount to cover the expenses and

costs of bringing the action. '^^ As with the federal version, if the Attorney
General or Inspector General intervened, the relator's share is fifteen to twenty

percent of the proceeds.'^ If neither intervenes and the relator proceeds alone,

the relator's share becomes twenty-five to thirty percent. ^^^ If the Attorney

General or Inspector General intervenes, and it is determined "that the evidence

used to prosecute the action consisted primarily ofinformation contained in: (A)

a transcript of a criminal, civil, or legislative hearing; (B) a legislative, and

administrative, or other public report, hearing, audit, or investigation; or (C) a

news media report," the relator's share is lowered to ten percent. '^^

As with the federal statute, the Act includes a "whistleblower" provision
which grants a right of action to "an employee who has been discharged,
demoted, suspended, threatened, harassed or otherwise discriminated against in

the terms and conditions ofemployment" ^^^ because the employee objected to an

act in violation of the statute; or initiated, testified, or assisted in the investigation

or related proceedings. In addition to reinstatement, the employee may recover
up to two times backpay with interest, special damages, reasonable attorney fees,

and the costs and expenses of litigation.
^^*

The Act grants the Attorney General and Inspector General investigative
subpoena power through so-called "civil investigative demands." These may be
issued in connection with an investigation involving a false claim. A civil
investigative demand may call for the production of documentary material, or
may demand testimony or answers to written interrogatories. ^^^ With a few
exceptions set out in the statute, procedures follow the Indiana Trial Rules.

^^°

A person who fails to comply with a civil investigative demand is subject to
Trial Rule 37 sanctions to the same extent as a person who has failed to
cooperate in discovery. However, a person who objects to a civil investigative
demand may seek a protective order under Trial Rule 26(C). ^^* The Act does not
specify the procedure by which such a request is to be brought to a court's

attention.

m. Tax

A. Congressional Hearings on Tax-Exempt Hospitals

Once again, questions regarding hospital tax exempt status and threats of

163. M§5-ll-5.5-6(a).

164. Id.

165. M§5-ll-5.5-6(a)(3).

166. M§5-ll-5.5-6(a)(2).

167. M§5-ll-5-8(a).

168. M§5-ll-5.5-8(b).

169. M§ 5-11-5.5-10.
170. M§ 5-11-5.5-18.
171. /J. §5-11-5.5-16.



1072 INDIANA LAW REVIEW [Vol. 39: 105

1

increased enforcement actions have been in the spotlight of tax issues affecting

tax-exempt hospitals this year. However, little enforcement action has been
taken to date and there has been little change in the basic standards governing

health care provider tax exemption at the federal level in the past thirty-six

years. ^^^ However, new critics of hospital tax exempt status are emerging
including IRS Commissioner Mark Everson, who has warned of "the gathering
storm" of enforcement efforts. ^^^ Additionally, congressional hearings in 2004
to 2005 have focused on hospital charges to the uninsured, charity care, and tax

exemption, claiming that tax-exempt hospitals are not doing enough charity care
in return for their tax-exempt status.

Over the past year, both the Senate Finance Committee and the House of
Representative Ways and Means Committee have heard extensive debate
regarding whether hospitals are sufficiently charitable to warrant continued tax-

exempt status. On May 26, 2005, Commissioner Everson testified before the
House Ways and Means Committee, at a hearing titled "A Review of the Tax-
Exempt Hospital Sector," and warned that the evolution of the health care
industry has "created opportunities for noncompliance" stating that the IRS
would vigorously monitor and deter abuse by tax-exempt organizations.*^"^
Commissioner Everson noted, "[i]t is difficult to differentiate for-profit from
nonprofit health care providers . . . [and while the] overwhelming majority of
charitable organizations do their utmost to comply with the letter and spirit of the
tax law[,] . . . there are increasing indications that the twin cancers of technical

manipulation and outright abuse that we saw develop in the profit-making
segments of the economy are now spreading to pockets of the nonprofit
sector."*^^

A major discussion at the hearing focused on a report prepared by the U.S.
Government Accountability Office at the Committee' s request. The report, titled
"Nonprofit, For-profit, and Government Hospitals: Uncompensated Care and
Other Community Benefits," compared the level of charity care provided by for-
profit, nonprofit and government hospitals in five states, including Indiana.

*^^

Generally, the report found that government hospitals devoted substantially

larger shares of their patient operating expenses to uncompensated care than did

172. Non-profit hospitals and health care organizations are exempt from federal income tax

as organizations described in Internal Revenue Code ("IRC") section 501(c)(3) if they are operated

and organized exclusively for charitable purposes within the meaning of the statute. Revenue

Ruling 69-545 sets forth the rationale for federal tax exemption, stating that hospitals promote the

health of a broad cross-section of the community, operating for "community benefit" and serving

a charitable purpose. Rev. Ruling 69-545, 1969-2 C.B. 1 17.

173. Allison Bennett, Everson Cautions Exempts Must Work to Fix Problems or Face

"Gathering Storm," 82 BNA, INC. DAILY TAX REP., Apr. 29. 2005, at G-9.

1 74. A Review ofthe Tax-Exempt Sector Before the H. Comm. on Ways & Means, 1 09th Cong.
(2005) (statement of Mark Everson, Commissioner, Internal Revenue Service).

175. Id.

176. U.S. Gov't Accountability Office, GAO-05-743T, Nonprofit, For-profit, and

Government Hospitals: Uncompensated Care and Other Community Benefits (2005).



2006] HEALTH LAW 1073

nonprofit and for-profit hospitals. '^^ The non-profit hospitals' uncompensated
care costs, as a percentage of patient operating costs, were higher than those of

for-profit hospitals. '^^ The burden of uncompensated care costs was not evenly
distributed within each hospital group but was concentrated in a small number

of hospitals. '^^ However, regardless of the ownership status, all of the hospitals

reported providing a wide range of other community benefits, including health
education and clinic services.

^^^

The Senate Finance Committee, lead by Chairman Charles Grassley, is
currently conducting its own investigation of tax-exempt hospital systems. On
May 25, 2005, Grassley sent a letter to ten large hospitals and health systems
requesting information in an effort "to learn whether the benefits they provide to

the needy justify the tax breaks they receive."^^' The letter sets forth twenty-five
questions regarding charity care and community benefit and twenty-one
questions regarding payments, charges, debt collection processes, and tax exempt

status.
^^^ The Senate Finance Committee is expected to introduce charity reform

legislation. The legislation will consider recommendations submitted by the
Panel on the Nonprofit Sector, formed by the hidependent Sector at the request

of the Senate Finance Committee.
^^^

Although it seems unlikely Congress will make any major changes to federal
tax laws governing tax exemption for hospitals, it is likely some changes will
occur as pressure from key congressional leaders continues to build and stepped-

up enforcement actions continue.

B. IRS Examination of Tax-Exempt Organization

On November 4, 2004, the IRS published guidelines for tax-exempt
organizations for 2005.^^"^ Executive compensation was listed as one of the four

critical enforcement initiatives for fiscal year 2005. Scrutiny has focused on two

main areas: the reporting or failure to report all forms of compensation and

benefits on the organization's annual Form 990 return, and specific types of
compensation and benefit practices, including, among others, no-interest or low-
interest loans, supplemental retirement plans, spouse travel, gifts to executives

177. Id. at 3.

178. Id.

179. Id

180. Id. at 4.

181. Press Release, Senate Fin. Comm., 109th Cong., Grassley Asks Non-Profit Hospitals to

Account for Activities Related to Their Tax-Exempt Status (May 25, 2005), available at

http://finance.senate.gov/press/Gpress/2005/prg052505,pcif.

182. Id

1 83. SenateFinanceCommittee, StaffDiscussionDraft (2004), available ar http://www.

senate.gov/~finance/hearings/testimony/2004test/062204stfdis.pdf(proposing a legislative reform

for tax-exempt healthcare providers).

1 84. I.R.S
. ,
FiscalYear2005 ExemptOrganizationsImplementingGuidelines, available

at http:// www.irs.gov/pub/irs-tege/implementing_guidelines_l 104.pdf.



1074 INDIANA LAW REVIEW [Vol. 39: 105

1

and directors, and tax gross-ups.

In response, the IRS has revised two forms. Form 990 and Form 1023, both
with a stated objective of helping the IRS monitor potential conflict of interests

and uncover possible tax avoidance transactions such as excessive compensation.

Required for all applications for tax-exempt status after May 1, 2005, the new
Form 1023 asks about payments to third parties who helped create the
organization; requests information about compensation and other financial

arrangements with officers, directors, trustees, employees, and independent

contractors; inquires about how the organization sets compensation that is
reasonable; requests information about family and business relationships and the

presence of conflict of interest policies within the organization; and asks

organizations to describe the benefits ofmembership, membership requirements,

and the relationship between individuals who receive benefits and key
individuals within the organization.

^^^

The IRS also revised Form 990 and Form 990 Schedule A.^^^ Under the
revised Form 990 Schedule A, organizations will have to disclose the
compensation paid to the five highest paid independent contractors providing

"other" services, in addition to the already required disclosure of information on

the five highest paid independent contractors providing professional services.
'^^

Among the changes to revised Form 990: (1) organizations will have to disclose
the total compensation paid to directors, officers, and key employees, including

compensation fromrelated entities ofthe organization; (2) directors, officers, and

key employees of an organization will have to disclose information regarding

family or business relationships; (3) organizations will have to report income to

former directors, officers, and key employees including, among others, retirement
packages and deferred compensation plans; and (4) organizations will have to

disclose whether they have a written conflict of interest policy. ^^^ The changes
to Form 990 and Form 990 Schedule A were only proposed at the time this
Article was drafted. The IRS was considering comments as it worked to finalize
these forms.

Finally, the IRS has also published proposed regulations clarifying the

relationship of the substantive requirements of tax-exempt status under section

501(c)(3) and imposition of intermediate sanctions under IRC section 4958.'^^

The proposed regulations provide guidance on the specific factors that the IRS
will use in determining whether a section 501(c)(3) organization is jeopardizing

185. Revised Form 1023 is available online. I.R.S., Dep't of the Treas., Form No. 1023,

Application for Recognition of Exemption (2004), available at http://www.irs.gov/pub/irs-

pdf/fl023.pdf.

186. Revised Form 990 is now available online. I.R.S., Dep't of the Treas., Form No 990,
http://www.irs.gov/pub/irs-pdf/f990.pdf.

187. Id.

188. Id.

189. Standards for Recognition of Tax-Exempt Status if Private Benefit Exists or if an

Applicable Tax-Exempt Organization Has Engaged in Excess Benefit Transaction(s),70 Fed. Reg.

53,599 (Sept. 9, 2005) (to be codified at 26 C.F.R. pts. 1 and 53).



2006] HEALTH LAW 1075

its tax exempt status as a result of engaging in one or more excess benefit
transactions and sets forth a "facts and circumstances" test to be applied in the

determination. ^^^ In considering whether to revoke tax-exempt status, the IRS
will examine all relevant facts and circumstances, including: (1) the size and

scope ofthe organization' s regular exempt activities; (2) the relationship between
the size and scope of the excess benefit transaction(s) and the organization's

regular exempt activities; (3) whether the organization has been involved in
repeated excess benefit transactions; (4) whether the organization has adopted

compliance measures intended to prevent the occurrence of future intermediate

sanctions violations; and (5) whether the excess benefit transaction has been

corrected or the organization has made a good faith effort to correct. ^^^

C. State and Local Tax Exemption Developments

The federal government is not the only one scrutinizing the practices of tax-
exempt organizations, state and local authorities are showing renewed interest in
hospital property tax exemptions. Local property tax exemptions are the biggest

savings for tax-exempt hospitals, followed by state and federal taxes. Local
government and municipalities, squeezed for revenue, have begun to challenge
property tax exemptions, either as outright attacks on the hospitals' exempt status
or as demands for payments in lieu of taxes ("PILOTs").^^^

Recently, the Illinois Department of Revenue revoked the state property tax
exemption for Provena Covenant Medical Center at the recommendation of the
Champaign County Board of Review. ^^^ After an ownership change. Provena
Covenant Medical Center reapplied for the property tax exemption. Provena was
denied the property tax exemption based on a number of factors, including
Provena' s community benefit report, which primarily consisted ofbad debt write-
offs; volunteer work done by hospital employees on their own time; and
Provena' s aggressive collection tactics including the use of collection agencies,

lawsuits, and even "body attachments," the legal term for the arrest of debtors
who fail to show up in court. ^^"^ Provena appealed the decision and is awaiting
an administrative law judge's decision.

Also, in April, the Champaign County Board of Review recommended that
another Illinois non-profit hospital be denied a property tax exemption for five

190. Mat 53,602.
191. Id.

1 92. PILOTS have been especially prevalent in Pennsylvania, which recently passed legislation

to objectify the standards for tax exemption after a large number of local exemption challenges. 10

Pa. Cons. Stat. §§ 371-85 (1999).

193. Lucette Lagnado, Hospital Found "Not Charitable" Loses Its Status as Tax Exempt,

Wall St. J., Feb. 19. 2004, at Bl; see also Julie Appleby, Scales Tipping Against Tax-Exempt
Hospitals: Critics Challenge Bill Collection, Charity Care, Salaries atNon-Profits, U.S.A. TODAY,

Aug. 24, 2004, at IB.

194. Id.



1076 INDIANA LAW REVIEW [Vol. 39: 105

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parcels of land. '^^ The board recommended that the Carle Foundation' s property
tax exemption be denied because of the foundation's inadequate provision of

charity care, pointing to the fact that the Carle Foundation only spends one-half

of one percent of its revenue on charity care, and its close association with a for-

profit physicians group. The board argued that the primary use of the Hospital
is to serve as a platform from which the physicians group and individual

physicians privately benefit.
^^^

D. Charity Care Class Action Litigation

Since July 2004, class action lawsuits alleging that hospitals have charged

uninsured patients fees well in excess of the amounts paid on behalf of insured

patients have been initiated in federal courts. However, the judicial consensus

is that these cases do not present viable federal claims.
^^^

The lawsuits, orchestrated by Richard Scruggs, a plaintiffs' attorney who is
credited with developing an aggressive, successful litigation strategy against the

tobacco industry in the 1990s, are postured as class actions against a tax-exempt

hospital system, the American Hospital Association ("AHA"), and additional

defendants including officers, directors, attorneys, and other persons who have
participated in the hospitals' decision-making process regarding pricing, billing,

and collection practices. ^^^ The complaints seek monetary damages; ask courts
to impose constructive trusts on the defendants' assets; and seek injunctions

prohibiting the hospital from charging the uninsured the full undiscounted cost

of care, charging the uninsured more than insured patients for the same services,
and prohibiting the use of aggressive and abusive collection practices in an

195. Text of the Recommendation can be found at http://www.co.champaign.iLus/BOR/

CARLE2004.pdf (last visited July 2, 2006).

196. Another Nonprofit Hospital Caught in Move to Revoke Property Tax Break, BNA, INC.

Daily Tax Rep. No. 79, Apr. 26, 2005, at H-3.

197. See Amato v. UPMC, 371 F. Supp. 2d 752 (W.D. Pa. 2005); Lorens v. Catholic Health
Care Partners, Inc., 356 F. Supp. 2d 827 (N.D. Ohio 2005); Shriner v. ProMedica Health Sys., 2005

WL 139128 (N.D. Ohio Jan. 21, 2005); Burton v. Beaumont Hosp., 373 F. Supp. 2d 707 (E.D.
Mich. 2005); Darr v. Sutter Health, 2004 WL 2873068 (N.D. Cal. Nov. 30, 2004); Kizzire v.
Baptist Health Sys., 343 F. Supp. 2d 1074 (N.D. Ala., 2004); Ferguson v. Centura Health Corp.,

358 F. Supp.2d 1014 (D. Colo., 2004); In re Not-for-Profit Hospital/Uninsured Patients Litigation,

341 F. Supp. 2d 1354 (Judicial Panel on Multidistrict Litigation 2004).

198. See Non-Profit Litigation Website, http://www.nfiplitigation.com (last visited Jan. 24,

2006) (providing press releases, fact sheets, background information and copies of the filed

complaints). This website has been taken down because most of the federal cases have been

dismissed. However, plaintiffs' lawyers have refiled many of the claims in state courts. These

claims focus more on "disparate pricing" than "charity care" and allege, among others, breach of

contract and state consumer protection claims. See Sutter Health Files Counterclaim in Class

Action over Group's Charity Care Program, 6 BNA, INC., CLASS ACTION LITIGATION 623 (2005);

Matthew Roberts & Mindy Staley, Hospitals Face Challenges to Tax-Exempt Status, CHARLOTTE
Bus. J., Dec. 2, 2005.



2006] HEALTH LAW 1077

attempt to collect fees from the uninsured. ^^^ The current lawsuits seem to be a
part of the larger, national debate on what "charitable" means and whether
nonprofits are deserving of their tax exempt status.

IV. Quality Assessment and Improvement

A. Patient Safety and Quality Improvement Act of2005

On July 29, 2005, the Patient Safety and Quality Improvement Act of 2005
C'Act")^^^ was signed into law by President George W. Bush. The Act amends
the Public Health Service Act^^^ by establishing confidentiality and privilege

protections for information obtained from the voluntary reporting of medical

errors.^^^ The Act comes as a response to the recommendations of the Institute
of Medicine's ("lOM") 1999 report To Err is Human: Building a Safer Health
System?^^ In the report, the lOM recommended that Congress "extend
comprehensive peer review protection to provider-generated quality improvement

and patient safety information and create a patient safety reporting system that

would allow providers to report medical error in a non-punitive environment.
"^^"^

The Act protects "patient safety work product" which is defined as

any data, reports, records, memoranda, analyses (such as root cause
analyses), or written or oral statements . . . which ... are assembled or

developed by a provider for reporting to a patient safety organization and

are . . . reported to a patient safety organization or developed by a patient

safety organization for the conduct of patient safety activities . . . }^^

Medical records, discharge information, and other information maintained or

developed separate from the patient safety evaluation system is specifically

excluded from the definition of patient safety work product. Pursuant to the Act,
the privilege and confidentiality protections are only afforded to information that

is actually reported, the mere assembling for the purpose of reporting medical
errors or other quality information programs is not enough to trigger

protection.^^^ Also, unlike HIPAA or state law reporting privileges, patient safety
work product continues to be privileged and confidential after disclosure.

Patient safety work product is voluntarily reported to patient safety
organizations ("PSOs"), which are to contract with providers of health care

199. Id.

200. Pub. L. No. 109-41, 1 19 Stat. 425 (2005).

201. 42 U.S.C. §§ 2996-21 to -26.

202. Pub. L. No. 109-41, 119 Stat. 425 (2005).

203

.

Institute ofMedicine, ToErr Is Human: Building a Safer Health System (2000).
204. Deborah A. Datte et. al.. National Peer Review Protection? Understanding the New

Patient Safety and Quality Improvement Act of2005, 9 HEALTH LAW. NEWS 1 1 (2005).
205. Pub. L. No. 109-41, 119 Stat. 425 (2005) (adopting new Public Health Service Act §

921(7)).

206. Id.



1078 INDIANA LAW REVIEW [Vol. 39: 105

1

services to receive and review the patient safety work product. PSOs are entities
whose "mission and primary activity" are "to conduct activities that are to
improve patient safety and the quality ofhealth care delivery."^^^ For recognition

as a PSO, the entity needs to provide the Secretary of DHHS with a certification
that the entity has policies and procedures in place to perform "patient safety

activities" including: (1) "[e]fforts to improve patient safety and the quality of

healthcare"; (2) "[t]he collection and analysis of patient safety work product";

(3) "[t]he development and dissemination of information with respect to

improving patient safety, such as recommendations, protocols, or information

regarding best practices"; (4) "[t]he utilization of patient safety work product for
the purposes of encouraging a culture of safety and of providing feedback and

assistance to effectively minimize patient risk"; (5) "[t]he maintenance of

procedures to preserve confidentiality with respect to patient safety work
product"; and (6) "[t]he provision of appropriate security measures with respect

to patient safety work product."^^^ In short, a PSO is more than a repository for
patient safety information, "[i]t must have an active staff, function to analyze the

work product reported to it, and make recommendations for the improvement of
care."^^^

The Act contains a whistle-blower protection provision which protects the
individuals who report medical errors. The provision prohibits providers from
taking "adverse employment action," including the loss of employment, failure

to promote, failure to provide any employment related benefit that the individual
is otherwise entitled to, and adverse evaluation or decisions relating to the

accreditation, certification, credentialing, or licensing of the individual.^^^

B. Indiana Medical Error Reporting System

Indiana recently became the second state to enact mandatory reporting
requirements for healthcare providers.^" Effective January 1, 2006, Indiana

hospitals are required to report a delineated number of medical errors to the
Indiana Department of Health ("DOH").^^^ The DOH passed the emergency rule
in response to Executive Order 05-10, a directive to establish a medical error

207. 42 U.S.C. § 299(b)-24(b)(l)(A) (2005) (adopting new Public Health Service Act § 924).

208. Id. § 299(b)-21(5) (adopting new Public Health Service Act §921(8)).

209. Datte et al., 5Mpra note 204.

210. Pub. L. No. 109-41, 1 19 Stat. 425 (2005) (adopting new Public Health Service Act §

922(e)).

211. Minnesota was the first state to provide a mandatory medical error reporting mechanism.

See Minn. Stat. §§ 144.706- 144.7069 (2004); see also National Academy for State Health Policy,

State Patient Safety Centers: A New Approach to Promote Patient Safety, http://www.nashp.org/

Files/fmal_web_report_l 1 .01 .04.pdf

2 1 2. LSA Document #05-326(E). LSA Document #05-326(E) is an emergency rule effective
until proposed rule 05-193 is finalized. Proposed Rule 05-193 will be published in the February

2005 Indiana Register for public comment.



2006] HEALTH LAW 1079

reporting and quality system.^'^ Executive Order 05-10 required the DOH to
develop minimum standards for medical error reporting, and mandated conferring
with various hospitals, physicians, pharmacist representatives, and quality

improvement experts while also consulting best practice guides in developing the

standards.

The regulations require hospitals to report multiple types of errors and make
a lists of mistakes available for public review.^'"^ The first list of hospital errors
is expected to be released in 2007. Governor Mitch Daniels believes that a

successfully implemented medical error reporting program will reduce the

frequency ofmedical errors, reveal causes oferror, and enable health professions

to design methods to prevent or discover errors before patients are harmed.^*^

Pursuant to the executive order, the medical error reporting system ("MERS"):

(1) should "ensure that patients' and healthcare professionals' identities are kept

confidential," (2) "not be used as the basis for punishing any healthcare

professional," (3) "require all healthcare professionals to report medical errors

promptly," (4) "require hospitals to report all MERS data to the DOH," (5)
"require DOH to regularly disseminate medical error data," (6) "require hospitals
to provide patients with easy to understand aggregate data and trends analysis,"

and (7) "require hospitals to share successful solutions and improvements with

other hospitals."^^^ The DOH is currently accepting comments on proposed
regulations.^ ^^ The final regulations are expected to replace the emergency rule
in spring 2006.

V. Antitrust

A. Post-Consummation Challenge to Hospital Merger

In 2005, the Federal Trade Commission ("FTC") successfully challenged a
hospital merger post-consummation, resulting in an order of divestiture of the

acquired facility. An FTC administrative law judge ("ALJ") determined that
Evanston Northwestern Healthcare Corporation ("ENH") had consummated an
illegal acquisition when it acquired Highland Park Hospital.^ *^ In Evanston
Northwestern Healthcare Corp,,^^^ the ALJ determined that the transaction
lessened competition substantially in the market for acute care inpatient services

and ordered that ENH divest Highland Park Hospital ("Highland Park").^^^

213. Ind. Exec. Order No. 05-10 (Jan. 10, 2005), av^Z/aMe a? http://www.in.gov/gov/media/eo/

EO_05- 1 0_Medical_Error_Reporting.pdf

214. Indiana Department of Health, 29 Ind. Reg. 1742 (proposed Feb. 1, 2006).

215. Ind. Exec. Order No. 05-10.

216. Id.

111. 29 Ind. Reg. 1742.

218. Post-Acquisition Evidence Dooms Deal In Acute Care Inpatient Services Sector, 89

BNA, Inc. Antitrust & Trade Reg. Rep. 443 (2005) [hereinafter Post-Acquisition Evidence].
219. Evanston N.W. Healthcare Corp., 70 Fed. Reg. 18,397 (FTC Apr. 11, 2005).

220. Post-Acquisition Evidence, supra note 218.



1080 INDIANA LAW REVIEW [Vol. 39: 105

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ENH acquired Highland Park in 2000 for more than $200 million. The
acquisition combined ENH's Evanston and Glenbrook Hospitals, both located in
Cook County, Illinois, with Highland Park, the nearest hospital north of the two
facilities.^^' The FTC contended that, after the acquisition, ENH raised prices far
above the price increases of comparable hospitals.^^^ ENH filed a notice of
appeal on October 26, 2005.

^^^

This case presented a rare opportunity to examine the actual effects of an

acquisition on price in the hospital industry. Most antitrust analyses occur
premerger and therefore involve projections based upon economic theory. This

case also reversed a string of losses by the FTC and the Antitrust Division of the
Department of Justice ("DOJ") in their attempts to challenge hospital mergers.

B. Physician Organizations

In 2005, the FTC entered into consent decrees for violations of Section 5 of
the Federal Trade Commission Act ("FTC Act")^^"^ with physicians groups in
Chicago,^^^ Cincinnati,^^^ New Mexico,^^^ and South Carolina.^^^

The Chicago consent decree involved Evanston Health Network Corporation
("EHN") and EHN Medical Group, Inc. ("EHN Medical").^^^ EHN is a nonprofit
corporation that owns EHN Faculty Practice Associates ("Faculty Practice").
Facility Practice is a nonprofit corporation that employs about 460 salaried

doctors.^^^ Faculty Practice is the sole shareholder of EHN Medical, which is a
for-profit corporation that represents Faculty Practice and over 400 independent

physicians in their contract negotiations with health plans.^^^ The FTC alleged
in its complaint that EHN Medical had violated Section 5 of the FTC Act by
facilitating agreements among competing physicians to fix reimbursement
rates.^^^ The FTC found no integration among the physicians and alleged that the
actions of EHN Medical increased the reimbursement rates paid by payors.

221. Id.

111. Id.

113. Notice ofAppeal, In re Evanston N.W. Healthcare Corp., No. 93 15 (FTC Oct. 26, 2005),

available at http://www.ftc.gov/os/adjpro/d93 15/05 1026enhnotofappeal.pdf.

224. 15 U.S.C. § 45 (2005).

225. See In re Evanston N.W. Healthcare Corp., 2005 FTC LEXIS 146 (Oct. 20, 2005).

226. See New Millennium Orthopaedics, LLC, 70 Fed. Reg. 24,588 (FTC May 10, 2005).
227. See San Juan IPA, Inc., 70 Fed. Reg. 30,949 (FTC May 3 1 , 2005).

228. See Preferred Health Services, Inc., 70 Fed. Reg. 1 1,675 (FTC Mar. 9, 2005); Partners

Health Network, 70 Fed. Reg. 47,202 (FTC Aug. 12, 2005).

229. Physicians ' Group Settles Cartel Charges, Will Cease Collective Bargaining Activities,

BNA, Inc., Antitrust & Trade Reg. Rep. 362 (2005) [hereinafter Physicians' Group]. Counts
I and II of the complaint against EHN involved the acquisition of Highland Park Hospital, which
was determined to be anticompetitive post-consummation. See discussion, supra Part V.A.

230. Physicians' Group, supra note 119.

231. Id.

232. Id.



2006] HEALTH LAW 1081

employers, and patients.
^^^

The South Carolina consent decree involved a physician-hospital
organization ("PHO"), Partner's Health Network, Inc. ("Partner's Health").

Partner's Health represented itself as a "messenger model" PHO. A messenger
model is a structure through which competing physicians may obtain the
efficiencies of price negotiations without coordinating reimbursement rates.

^^"^

The FTC said that Partner's Health was not a legal messenger model because it
enabled and assisted competing physicians in coordinating reimbursement rates

and other terms with health plans and orchestrated refusals to deal.^^^

Each of the consent decrees prohibited the physician organizations from

entering into agreements to negotiate with payors, other than through "qualified

risk-sharing joint arrangements" and "qualified clinically integrated joint

arrangements."^^^ In a qualified risk-sharing joint arrangement, all physician

participants share financial risk, which would create incentives to control costs

jointly.^^^ A qualified clinically-integrated joint arrangement would require all
physician participants to participate in active and ongoing programs to evaluate

and modify their clinical practice patterns to create a high degree of

interdependence and cooperation to control costs and ensure quality service.^^*

The consent decrees require the physician organizations to notify the FTC prior
to engaging in certain actions for twenty years.

C. Competition Between Physician-Owned Specialty Hospitals and
General Acute-Care Hospitals

A controversial topic in 2005 was the effect on general acute-care hospitals
when physician-owned specialty hospitals enter a market. Physician-owned
specialty hospitals have been criticized because they target the most profitable

patients, leaving less profitable patients to be served by general acute-care

hospitals. Federal law prohibits physicians from investing in general acute-care

hospitals.^^^ Thus, to retaliate for loss of referrals, some general acute-care
hospitals have terminated the privileges of physicians that have an ownership

interest in specialty hospitals.^"^^ Some physician-owners have challenged such
terminations in court. Most such cases have been won by the general acute-care

233. Id.

I'iA. Id.

235. Id.

236. Id.

237. Id.

238. Id.

239. 42 U.S.C. § 1 395nn (2000). The Stark Law prevents physicians from referring Medicare

and Medicaid "designated health services," including inpatient and outpatient hospital services and

a number of other items and services, to an entity with which the physician has a financial

relationship unless an exception applies.

240. David A. Argue, Economists Inc., Competition by Physician-Owned Speciality

Hospitals: A Brief Analysis of Poucy and Litigation 3 (2005).



1082 INDIANA LAW REVIEW [Vol. 39: 105

1

hospitals on the basis that the market at issue was competitive, irrespective of

whether or not physician-owners of specialty hospitals were excluded from

privileges at a particular hospital.

Similar arguments were used in Amett Physician Group, P.C. v. Greater

Lafayette Health Services, Inc. ^'^^ which addressed the termination ofa physician

group's exclusive service contract and HMO agreement, allegedly in response to
the plaintiffs' attempt to open their own acute-care hospital.^"^^ A physicians'
group and its affiliated clinic, health plan, and HMO brought the claim against
the only existing hospital system in town and twenty-one doctors who had left the
plaintiff to join a physician group affiliated with the defendant hospital.^"^^

Plaintiffs claimed that the hospital had conspired with the defendant doctors to

violate Section 1 of the Sherman Act in an effort to deny the plaintiffs access to

consumers of general acute-care hospital services in the Lafayette, Indiana

area.^'^ The court determined that staffing decisions at a single hospital cannot
violate Section 1 of the Sherman Act and that the plaintiffs did not have antitrust

standing or antitrust injury.
^"^^ The court found no evidence that would connect

the defendant hospital's terminations to the effort to set up a competing acute-

care hospital. It reiterated the principle that "antitrust laws protect competition,

not competitors.
"^"^^

D. Exclusive Dealing

A rare exclusive-dealing case received considerable publicity in 2005. The
Third Circuit court of appeals affirmed a ruling that Dentsply International, Inc.

("Dentsply") had unlawfully maintained its monopoly over prefabricated

artificial teeth through an exclusivity policy that prevented dealers from selling

the artificial teeth of other manufacturers.^'*^ In United States v. Dentsply

International, Inc,,^^^ the court affirmed a ruling that Dentsply had monopoly

power in a market consisting of the combined sale of artificial teeth to dental

laboratories and dealers, and had excluded competitors.^"*^ Dentsply controlled

approximately seventy-five to eighty percent of the market for artificial teeth.^^°

In determining the relevant market, the court included both sales to the

241. 382 F. Supp. 2d 1092 (N.D. Ind. 2005).

242. Ashley McKinney Fisher, Antitrust Health Care Recent Developments, 2005 A.B.A.

Health Care Comm. 1 (2005); Amett, 382 F. Supp. 2d at 1095. The opinion does not indicate

whether such acute care hospital was general or specialty.

243. Ame«, 382 F. Supp. 2d at 1095.

244. Id.

245. Id.

246. M at 1095, 1096.
247. Dentsply 's Exclusivity Policy Illegally Maintains its Artificial Tooth Monopoly, 88 BNA,

Inc., Antitrust & Trade Reg. Rep. 207 (2005) [hereinafter Dentsply's Exclusivity].
248. 399 F.3d 181 (3d Cir. 2005), cert, denied, 126 S. Ct. 1023 (2006).

249. Dentsply 's Exclusivity, supra note 247.

250. Id. (on a revenue basis).



2006] HEALTH LAW 1083

laboratories and sales to the dental dealers.^^' The court concluded that
Dentsply's share of the market was more than adequate to establish a prima facie

case of market power and rejected the district court's finding that other
manufacturers in the market could compete by marketing directly to dental

labs.^^^ In addition, Dentsply's actions demonstrated its intent to exclude

competitors and maintain monopolistic powerby successfully prohibiting dealers

from handling competitors' teeth.^^^ Another indication of Dentsply's market

power was its control of prices, which it was able to set without consideration of

its competitors, something that a firm without monopoly power would not be able

to do.'^'

In addition to market power, the Third Circuit also found that Dentsply used

its power to adversely affect competition in the market.^^^ By effectively
preventing dealers from carrying competitors' teeth, the ultimate users—the
dental labs—also could not purchase teeth ofother manufacturers, and thus could
not fulfill customer requests for alternative teeth lines.^^^ These requests were

denied by dealers because of fear of being cutoff by Dentsply. This situation

created a barrier to entry to competitors in the market. Furthermore, the court

determined that Dentsply's proffered business justification was pretextual and
that Dentsply could not successfully show a pro-competitive objective for its
exclusivity policy.^^^

Dentsply also involved allegations of resale price maintenance against

Dentsply by dental labs. The dental labs purchased artificial teeth via a network
of authorized dealers. If a dealer did not have the requested teeth in stock,

Dentsply would "drop ship" teeth directly to the labs, but billing and collection

services were still handled by the dealers.^^^ The plaintiffs alleged, inter alia, that
Dentsply and its dealers agreed to allow Dentsply to set dealers' resale prices.

^^^

Although Dentsply provided a "suggested price" list to dealers, which ordinarily

is permissible, Dentsply went a step further by requiring any deviation from the

suggested prices to be cleared with Dentsply; such deviations, once permitted,

were allowed only when a lab was considering buying a competitor's product for
reasons of price.^^° In these instances, Dentsply, not the dealer, negotiated with

the lab to determine a price at which the dealer would sell the teeth to the lab.^^^
The dental labs alleged that these practices caused them to purchase teeth at

25 1

.

Dentsply 's Exclusivity, supra note 247; Dentsply, 399 F.3d at 1 88.

252. Dentsply's Exclusivity, supra note 241.

253. Id.

254. Id.; Dentsply, 399 F.3d Sit 19\.

255. Dentsply, 399 F.3d at 191.

256. Dentsply's Exclusivity, supra note 247.

257. Id.

258. Id.

259. Id.

260. Id.

261. Court Implants Overcharge Claim by Dental Labs Against Dentsply, 89 BNA, INC.,

Antitrust & Trade Reg. Rep. 305 (2005) [hereinafter Court Implants].



1084 INDIANA LAW REVIEW [Vol. 39: 105

1

artificially high prices.
^^^

Finally, the court of appeals in Dentsply allowed an exception to the Illinois

Brick^^^ indirect purchaser rule by applying a co-conspirator exception in a resale

price maintenance case involving the sale of artificial teeth.^^"^ The indirect
purchaser rule denies standing to purchasers suing manufacturers for illegal

overcharges that have been "passed on" to the indirect purchasers through

distributors or other middlemen,^^^ and generally results in end purchasers being

denied the ability to recover for price fixing conspiracies of manufacturers. The
policy behind this rule is to avoid duplicative recovery from the manufacturer by

the middlemen and the ultimate purchaser.^^^ The court determined that dental
laboratories have standing to sue Dentsply for alleged overcharges so long as the

alleged co-conspirators—Dentsply's dealer-middlemen—are named as
defendants in the lawsuit.^^^

E. Rule ofReason Analysisfor PBM Price Fixing Cases

In North Jackson Pharmacy, Inc. v. Caremark RX, Inc.,^^^ an independent

retail pharmacy sued CaremarkRX ("Caremark"), a pharmacy benefits manager,
under Section 1 of the Sherman Act for Caremark' s efforts to negotiate reduced

prices on behalf of its members, as well as for price fixing with other PBMs.^^^

The plaintiffs alleged that they and other independent pharmacies were forced
into a choice between being included in the network and having to accept

"unconscionably low" reimbursement rates or leaving the network and losing

access to Caremark' s subscribers.^^° Caremark filed a Rule 16(c) issue-

narrowing motion for the limited purpose of seeking an order from the court that

Caremark' s efforts in coordinating the purchase price on behalf of independent

pharmacies should be analyzed under the rule of reason rather than the per se

rule.^^^ The question of markets or market power was not before the court due
to the procedural issues at this stage in the litigation.^^^

The district court granted Caremark' s motion and ruled that the plaintiff's
claim should be decided under a rule of reason analysis.^^^ The district court
determined that Caremark' s collective purchases were not a marked restraint of

262. Id.

263. 111. Brick Co. v. Illinois, 431 U.S. 720 (1977).

264. Howard Hess Dental Lab. v. Dentsply Int'l, Inc., 424 F.3d 363 (3d Cir. 2005), cert,

denied sub nom. Jersey Dental Labs. Inc. v. Dentsply Int'l, Inc., 126 S. Ct. 2320 (2006).

265. Court Implants, supra note 261.

266. Id.

267. Id.

268. 385 F. Supp. 2d 740 (N.D. 111. 2005).

269. Fisher, supra note 242, at 3.

270. Id.

271. Id.\ North Jackson Pharmacy, 385 F. Supp. 2d at 743.

272. Fisher, supra note 242, at 3.

273. Id.; North Jackson Pharmacy, 385 F. Supp. 2d at 743.



2006] HEALTH LAW 1085

trade but could create efficiencies appropriate for consideration under the rule of

reason.^^"^ The court was influenced by a 2004 report^^^ in which the FTC and the
Department of Justice discussed the procompetitive benefit of PBMs to
consumers.^^^ The report stated that consumers who have a prescription drug
insurance plan administered by a PBM enjoy substantial cost savings over cash-

977
paymg customers.

VI. Health Information Privacy and Security

A. HIPAA Security Rule Effective

In addition to creating regulations for the privacy of protected health

information ("PHI"), the Health Insurance Portability and Accountability Act of

1996 ("HIPAA") also mandated the Department of Health and Human Services
("HHS") to create regulations that govern the security of protected health
information (the "Security Standards").^^^ The Security Standards define the
administrative, physical, and technical safeguards to protect the confidentiality,

integrity, and availability of electronic health information ("EPHI"). The
Security Standards require covered entities to implement basic safeguards to

protect EPHI from unauthorized access, alteration, deletion, and transmission.
The scope of information covered by the Security Standards is more limited

than that of the Privacy Rule. The Privacy Rule applies to protected health
information in any form, whereas the Security Standards apply only to protected

health information in electronic form."^^^ The Security Standards' application is
limited to protected health information that is transmitted or maintained by or in

electronic media.^^^ Electronic media includes computer hard drives, magnetic

tapes or disks, optical disks, the internet, extranets, leased lines, dial-up lines,

private networks, and moving data on floppy disks. Electronic media neither
includes facsimiles, telephone transmissions, nor video teleconferencing or

messages left on voicemail.^^^

Covered entities must modify their systems to meet the Security Standards.

However, they are able to schedule the implementation of the security standards

274. Fisher, supra note 242, at 3.

275

.

Department of Justice, Federal Trade Commission, Improving Health Care: A
Dose of Competition (2004), available at http://www.usdoj.gov/atr/public/health_care/

204694.htm.

276. North Jackson Pharmacy, 385 F. Supp. 2d at 750; Fisher, supra note 242, at 3.

277. North Jackson Pharmacy, 385 F. Supp. 2d at 750.

278. The Centers of Medicare and Medicaid Services within the Department of Health and

Human Services promulgated the Security Standards and has enforcement responsibility for the

Standards. CMS maintains a website with helpful compliance tools. CMS, Security Materials,
http://new.cms.hhs.gov/educationmaterials/04_SecurityMaterials.asp? (last visited July 2, 2006).

279. 45 C.F.R. § 164.302 (2005).

280. Id.

281. 45 C.F.R. § 160.103.



1086 INDIANA LAW REVIEW [Vol. 39: 1051

in a way that best fits their needs. Health care providers and large health plans
were required to be compliant with the Security Standards by April 20, 2005.^^^

Small health plans must meet the Security Standards by April 20, 2006.^^^

The Security Standards require covered entities to:

(1) [e]nsure the confidentiality, integrity, and availabihty of all EPHI the
covered entity creates, receives, maintains, or transmits[;] (2) [pjrotect

against any reasonably anticipated threats or hazards to the security or

integrity of such information[;] (3) [p]rotect against any reasonably

anticipated uses or disclosures of such information that are not permitted

or required [by the Privacy Rule;] and (4) [e]nsure compliance by

workforce members.
^^"^

To ensure the security of EPHI, the Security Standards require protections
in three general categories: administrative safeguards, physical safeguards, and

technical safeguards.^^^ The Regulations break each of these categories down
into various "Standards" that must be achieved.

The administrative safeguard category of the Security Standards details the
administrative actions, policies, and procedures to manage the selection,
development, implementation, and maintenance of security measures to protect

EPHI and to manage the conduct of the covered entity's workforce in relation to
the protection of EPHI.^^^ The administrative safeguards are broken down into
nine standards that must be met: (i) security management process; (ii) assigned
security responsibility; (iii) workforce security; (iv) information access

management; (v) security awareness and training; (vi) security incident

procedures; (vii) contingency plan; (viii) evaluation; and (ix) business associate

contracts.
^^^

The second general category under the Security Standards is physical
safeguards. "Physical [s]afeguards are [those] physical measures, policies, and

procedures to protect a covered entity's electronic information systems and

related buildings and equipment, from natural and environmental hazards, and

unauthorized intrusion."^^^ To comply with the physical safeguards, a covered
entity must achieve four separate standards: (i) facility access controls; (ii)

workstation use; (iii) workstation security; and (iv) device and media controls.^^^

The final category of safeguards for EPHI under the Security Standards is
technical safeguards. These safeguards are the technology and the policy and

procedures for its use that protect EPHI and control access to it.^^° This category

282. 45 C.F.R. §§ 164.318(a)(1), 164.318(c).

283. Id. § 164.318(a)(2).

284. 45 C.F.R. § 164.306(a).

285. 45 C.F.R. §§ 164.308, 164.310, 164.312.

286. 45 C.F.R. § 164.304.

287. 45 C.F.R. § 164.308(a)-(b).

288. 45 C.F.R. § 164.304.

289. 45 C.F.R. § 164.3 10(a)-(d).

290. 45 C.F.R. § 164.304.



2006] HEALTH LAW 1087

is broken down into five standards: (i) access control; (ii) audit controls; (iii)
integrity; (iv) person or entity authentication; and (v) transmission Security.^^'

For covered entities to meet the standards, the Security Standards set forth

various "Implementation Specifications" ("IS"). Some of the IS are required and
some are merely addressable. If an IS is required, a covered entity must
implement it to achieve compliance with the standard to which it relates. If the

IS is addressable, a covered entity must assess "whether the IS is a reasonable

and appropriate way" for a covered entity to meet the Standard given the covered
entity's environment.^^^

Each covered entity must decide whether it should implement the addressable

IS by taking into account its risk analysis, risk mitigation strategy, what security

measures are already in place, and the cost of the implementation. If the

addressable IS is reasonable, the covered entity must implement it.^^^ If the IS

is deemed to be inappropriate or unreasonable, the covered entity must determine
whether a reasonable alternative can be implemented. If no reasonable

alternative is available, then the covered entity may decide not to implement the
addressable IS.^^"^ In both of these latter cases, the entity must document the

decision not to implement the addressable specification, the rationale behind the

decision, and how the applicable security Standard is otherwise being met.^^^

B. HIPAA Civil Enforcement

On April 18, 2005, HHS issued Proposed Final Regulations that set forth the
HHS' policies and procedures for enforcing HDPAA.^^^ HHS's approach to the
Regulations is to provide clear and easy to understand standards that provide

consistent results in the interest of fairness and that provide the Secretary ofHHS
with reasonable discretion. HHS does not intend for the standards to be "overly
prescriptive in areas where it would be helpful to gain experience with the

practical impact of the HIPAA rule[s] to avoid unintended adverse effects."^^^

291. 45 C.F.R. § 164.312(aHe).

292. 45 C.F.R. § 164.306(d).

293. Id. § 164.306(d)(3)(i)-(ii).

294. Id. § 164.306(d)(3)(ii).

295. Id.

296. HIPAA Administrative Simplification; Enforcement, 70 Fed. Reg. 20,224 (proposed Apr.

18, 2005) (to be codified at 45 C.F.R. pts. 160 and 164). On April 17, 2003, HHS had previously
published an Interim Final Rule establishing the rules of procedure for the imposition of civil

money penalties on entities that violate the HIPAA Administrative Simplification standards. Civil

Money Penalties: Procedures for Investigations, Imposition of Penalties, and Hearings, 68 Fed.

Reg. 18,895(Apr. 17, 2003) (to be codified at 45 C.F.R. pt. 160). The Interim Final Rule addressed

the procedural aspects of imposing civil money penalties such as notices of proposed penalty

determinations, discovery procedures, hearing procedures, subpoenas, witnesses, and evidence

related to civil money penalty enforcement actions. In contrast, the Proposed Rule discussed in the

text above addresses HHS's enforcement philosophy.

297. HIPAA Administrative Simplification; Enforcement, 70 Fed. Reg. at 20,227.



1088 INDIANA LAW REVIEW [Vol. 39:1051

The regulations would apply the same investigation and penalty process to
all violations of HIPAA, whether the violation involves privacy, security,
portability, or non-discrimination. In its discussion ofthe Proposed Regulations,

HHS confirms that most investigations are the result of complaints filed by
individuals, and HHS emphasizes that "covered entities may not threaten,
intimidate, coerce, discriminate against, or take any other retaliatory action"

against persons who complain to HHS or persons who cooperate in the
enforcement process.^^^ Although most enforcement actions arise through

individual complaints, the Secretary reserves the right to perform random
compliance audits.^^^

Under the Proposed Regulations, ifan investigation determines that a HIPAA
violation has occurred, HHS will attempt to reach an informal resolution with the
covered entity. This generally would involve correction of the problem by the
covered entity, or a plan of action to correct the violation. Penalties will not be

assessed if an informal resolution is reached.
^^

If an informal resolution is not reached, HHS will advise the covered entity
of its determination and offer the entity an opportunity to provide written

evidence and explain any mitigating factors.^^^ If HHS then determines that a
penalty is appropriate, it has broad discretion in determining the amount of the
penalty. Under the law, penalties may not exceed $100 per violation, to a
maximum of $25,000 per identical violation per calendar year.^°^ Because many
violations involve multiple instances ofthe violation, the proposed rule describes

how HHS will bundle multiple transactions.^^^ In general, the bundling will be
done in a manner favorable to the covered entity. If the covered entity disagrees
with the penalty imposed by HHS, it is entitled to two administrative appeals,
after which it may file in court.^^ HHS further noted that if it imposes penalties
under its jurisdiction, a covered entity may still be subject to other penalties if its
acts have also violated other state or federal laws.^^^

HHS will not impose a penalty if the violator demonstrates that (a) it did not
have knowledge of the violation and would not have been aware of the violation

even with reasonable diligence, or (b) the violation was "due to reasonable cause
and not willful neglect" and the violation was corrected within thirty days of
uncovering the violation (or it will be promptly corrected).^°^ Furthermore, civil

penalties will not be assessed if criminal violations are involved.^^^ In assessing

the penalty, HHS will consider the time period of the violation, the type and

298. /^. at 20, 227, 20,251.

299. Mat 20,226.
300. Mat 20,250.
301. Proposed 45 C.F.R. § 160.3 12(a)(3)(i).

302. Proposed 45 C.F.R. § 160.404(b).

303. Proposed 45 C.F.R. § 160.406.

304. Proposed 45 C.F.R. §§ 160.504, 160.548.

305. Proposed 45 C.F.R. § 160.418.

306. Proposed 45 C.F.R. § 160.410(b).

307. Id.



2006] HEALTH LAW 1089

degree of harm to the individual, intent, attempts to rectify the violation,
cooperation with the investigation, and the existence or absence of other

violations/^^^

The proposed regulations make it clear that a covered entity can be held
civilly liable for the acts and omissions of its employees. A covered entity will
not be held responsible for the acts and omissions of its business associates as

long as it has received assurances from the business associate that it will

safeguard the information it receives.^^^ With such assurances, there is no duty
to monitor the actions ofone's business associates, although there is a duty to act

if the covered entity is actually aware of a pattern of business associate

violations.

When HHS finalizes the proposed regulations, it will notify the general
public. There currently is no stated time table for finalization.

C HIPAA Criminal Enforcement
On June 1, 2005, the Office of Legal Counsel of the U.S. Department of

Justice wrote a memorandum expressing its opinion as to whether only covered
entities may be criminally liable for violations of HIPAA' s privacy and security
standards, or if employees and others not directly regulated by the statute may be
prosecuted as well.^*^ The opinion concluded that only those entities that are
explicitly covered by HIPAA (health plans, health care providers that engage in
standard electronic transactions, and health care clearinghouses) may be
prosecuted for criminal violations of HIPAA. Specific individuals may be
prosecuted only due to their corporate (generally managerial) position, or under

conspiracy or aiding and abetting laws.

The criminal penalties under HIPAA are significant: (1) a fine of up to
$50,000 and/or up to one year imprisonment for knowingly using or causing to

be used a unique health identifier, or obtaining or disclosing individually

identifiable health information about an individual; (2) a fine of up to $100,000
and/or up to five years imprisonment for violations committed under false

pretenses; and (3) a fine of up to $250,000 and/or up to ten years' imprisonment
for violations committed with intent to sell or use the information for commercial

advantage, personal gain, or malicious harm.

The memorandum further held that prosecution merely requires that the
offender knowingly used, obtained, or disclosed the individually identifiable

health information, and not that the offender also knew that using the information
violated HIPAA.

308. Proposed 45 C.F.R. § 160.408.

309. 45 C.F.R. § 160.402 (2005).

310. See Scope of Criminal Enforcement under 42 U.S.C. § 1320d-6, Memorandum Opinion

for the General Counsel Department of Health and Human Services and the Senior Counsel to the
Deputy Attorney General (June 1, 2005), http://www.usdoj.gov/olc/hipaa_fmal.htm.



1090 INDIANA LAW REVIEW [Vol. 39: 105

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D. Other HIPAA Guidance and Developments

During 2005, HHS's Office for Civil Rights ("OCR"—the enforcing Office
for the HIPAA Privacy Rule) issued a number of pieces of guidance, principally
through Questions and Answers on its website, including confirmation that (1)
a health plan may disclose protected health information ("PHI") to a state child
support enforcement agency in response to a National Medical Child Support

Order; (2) a health care provider may disclose PHI to an interpreter without an
individual's authorization when using an interpreter to communicate with an
individual; (3) a covered entity may disclose PHI without an individual's
authorization to a Protection and Advocacy system when the disclosure is
required by law; (4) group health plans (or their health insurers) may disclose
PHI without an individual's authorization to plan sponsors for the plan sponsor
to provide information required by the Centers for Medicare and Medicaid

Services for the purposes ofapplying for and maintaining the retiree drug subsidy

under Medicare Part D; and (5) that broad disclosures of PHI are authorized by
the Privacy Rule for purposes of treating the victims and evacuees of Hurricane

Katrina.^^^

Also, the constitutionality and procedural creation of the Privacy Rule were

upheld in a unanimous decision from the United States Court of Appeals for the

Third Circuit. In Citizens for Health v. Leavitt,^^^ the plaintiffs contended that

the Privacy Rule's permissive allowance of the use of individuals' protected

health information without their consent for purposes of treatment, payment, and

health care operations violated the First and Fifth Amendments to the U.S.
Constitution.^ ^^ The court disagreed and held that the Privacy Rule (and
therefore the government) did not compel any disclosure under the Privacy

Rule.^*"^ The Privacy Rule merely makes such disclosures permissive and any
decisions to disclose protected health information were made by individual
covered entities.^^^ Therefore, the plaintiffs could not establish sufficient

governmental action to maintain constitutional claims.^'^ Further, the court held

that the Privacy Rule was legitimately promulgated in compliance with the

Administrative Procedures Act and its existence could not be challenged on

procedural grounds.^^^ It is likely that this will be one of the last major

challenges to the creation of the Privacy Rule.

311. All OCR Questions and Answers and other Hurricane Katrina Guidance discussed in this
section may be found at OCR's website, at http://www.hhs.gov/ocr/hipaa.

312. 428 F.3d 167 (3d Cir. 2005), petition for cert, filed, lA U.S.L.W. 3600 (U.S. Apr. 13,

2006) (No. 05-1311).

313. M. at 175.

314. /^. at 184.

315. M. at 177.

316. Id. at 186.

317. Mat 186-88.



2006] HEALTH LAW 1091

vn. Reimbursement

A. New Medicare Claims Appeal Process

On March 8, 2005, the Centers for Medicare and Medicaid Services issued
its interim final rule regarding changes to the Medicare appeal procedures.^

'^

Changes to the Medicare claims appeal process were required by two recent
laws, the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection
Act of 2000 ("BIPA")^'^ and the MMA.^^^ The rules set forth the administrative
appeal requirements for Medicare carriers, fiscal intermediaries. Qualified

Independent Contractors ("QIC"), Administrative Law Judges ("ALJ"), and the
Medicare Appeals Council ("MAC").^^^

The new Medicare claims appeal process consists of five levels of appeal.
First, the Medicare contractor makes an initial determination of the submitted
Part A or Part B claim.^^^ If a party is dissatisfied with the initial determination,
the party may request a redetermination of the claim within 120 days.^^^ The
Medicare contractor must issue a decision within sixty days after receiving the

request for redetermination.^^"^ Second, following the Medicare contractor's

redetermination, the party may request reconsideration within 180 days from the
date of redetermination with a QIC.^^^ The QIC must issue a decision within
sixty days.^^^ Third, the party may request a hearing with an ALJ.^^^ The ALJ
will conduct a hearing if the amount in controversy is greater than or equal to
$100 and the request is filed within sixty days of the reconsideration decision.
The ALJ must issue a decision within ninety days. Fourth, the party may request
the MAC to review the case if the request is filed within sixty days.^^^ The MAC
must issue a decision within ninety days. Finally, the party may file in federal
district court if the amount in controversy is greater than or equal to $1000 and
the request is filed within sixty days of the MAC's decision.^^^ The new
Medicare claims appeal process is effective May 1, 2005, for Part A claims and
January 1, 2006, for Part B claims.

318. Medicare Program: Changes to Medicare Claims Appeal Procedures, 70 Fed. Reg.

1 1,420 (Mar. 8, 2005) (to be codified at 42 C.F.R. pts. 401 and 405).

319. Pub. L. 106-554 § 521 (2000).

320. Pub. L. 108-173, 1 17 Stat. 2066 (Dec. 8, 2003).

321. Medicare Program: Changes to Medicare Claims Appeal Procedures, 70 Fed. Reg. at

11,420-11,467.

322. 42 C.F.R. § 405.921 (2005).

323. 42 C.F.R. § 940-942.

324. 42 C.F.R. § 405.940-958.

325. 42 C.F.R. §§ 405.960-978.

326. 42 C.F.R. § 405.966.

327. 42 C.F.R. §§ 405.1000-1054.

328. 42 C.F.R. §405.1102.

329. 42 C.F.R. §405. 1136(e).



1092 INDIANA LAW REVIEW [Vol. 39: 105

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B. Payfor Performance ("P4P") Initiatives

Medicare is developing various initiatives to encourage quality improvement

in the care of Medicare beneficiaries. Pay for Performance CT4P") Initiatives
are targeted at all health care settings where Medicare beneficiaries receive their

health care, including hospitals, physicians' offices, ambulatory care facilities,

nursing homes, home health care agencies, and dialysis facilities. ^^° P4P
initiatives reward health care providers through incentive payments for, among
other things, improving the quality, efficiency, and coordination of care. Pilot

P4P Initiatives are currently being tested, including the Hospital Quality
Initiative, the Physician Group Practice Demonstration, and the Chronic Care
Improvement Program,

^^'

C. Emergency Health Servicesfor Undocumented Aliens

Undocumented aliens' use of medical services and the resulting
unreimbursed costs associated with furnishing emergency health services to

undocumented aliens has been a long-standing issue for hospitals and other

emergency providers.^^^ Pursuant to the Emergency Medical Treatment and
Labor Act ("EMTALA"), hospitals participating in Medicare are required to
medically screen all persons seeking emergency care and provide the treatment

necessary to stabilize those who have an emergency condition, regardless of
payment method or insurance status.^^^ Furnishing care to undocumented aliens

has left hospitals and other emergency providers, especially those on border

states or with high populations of undocumented aliens, with large amounts of

unreimbursable care costs.

Recognizing this problem. Section 1011 of the MMA provides $1 billion
through 2008 to help hospitals and other emergency health care providers recoup

some of the unreimbursed cost.^^"^ Section 101 1 provides $250 million per year
for fiscal years 2005 through 2008.^^^ Two-thirds of the funds will be divided

among the fifty states and the District of Columbia. The remaining one-third will
be divided among the six states with the largest number of undocumented alien
apprehensions. Payments will be made directly to hospitals, certain physicians,
and ambulance providers for the unreimbursed costs of providing services under

EMTALA. Section 1011 funds can be used to cover all medically necessary and
appropriate services furnished to undocumented aliens who received emergency
services required by EMTALA and any related hospital inpatient, outpatient, and
ambulance services.

^^^

330. CMS, Fact Sheet: Medicare "Pay for Performance (P4P)" Initiatives (Jan. 31, 2005),

available at http://www.cms.hhs.gov/media/press/release.asp? Counter=1343.

331. Id.

332. Cf. Pub. L. 108-173, §1011,117 Stat. 2066 (Dec. 8, 2003).

333. 42 U.S.C. § 1395dd (2000).

334. Pub. L. 108-173, §1011,117 Stat. 2066 (Dec. 8, 2003).

335. Id.

336. Id.



2006] HEALTH LAW 1093

D. Medicare Payment System Changes

Over the past year there have been a few significant changes to the Medicare

payment system. First, on November 3, 2004, CMS announced a new Medicare
prospective payment system ("PPS") final rule for inpatient psychiatric facilities

("IPFs"), which will replace the cost-based payment system on or after January

1, 2005.^^^ Next, on May 19, 2005, CMS proposed a payment increase for
inpatient rehabilitation facilities to more accurately reflect the costs of
rehabilitation services. ^^^ Finally, on August 26, 2005, CMS published a final
rule regarding Medicare coverage of power mobility devices ("PMDs"), which
include power wheelchairs and power operated vehicles, to address inflated and
falsified billing.^^^ The final rule sets forth revised conditions for Medicare
payment of PMDs, denying payment for motorized or power wheelchair unless
a physician or a physician assistant, nurse practitioner, or clinical nurse specialist

has conducted a face-to-face examination of the beneficiary and has written a

prescription for the item.^'^^

E. Medicaid DSH Payments

On August 26, 2005, CMS published a proposed rule which would
implement section 1001(d) of the MMA, which requires states to report
additional information about their Disproportionate Share Hospital ("DSH")
programs.^"^^ Under the proposed rule, each state must submit an annual report
that includes: (1) hospital name; (2) Medicare provider number; (3) Medicaid

provider number; (4) type of hospital; (5) type of hospital ownership; (6)
Medicaid inpatient utilization rate; (7) low income utilization rate; (8)
disproportionate share hospital payments; (9) regular Medicaid rate payments;

(10) Medicaid managed care organization payments; (11) supplemental/enhanced
Medicaid payments; (12) indigent care revenue; (13) transfers; (14) total cost of

care; (15) uncompensated care costs; and (16) Medicaid eligible and uninsured

individuals receiving services.^"^^

The proposed rule also requires each state to have its DSH payment program
independently audited. The audit must verify:

337. CMS, Medicare Announces New Payment System for Inpatient Facilities (Nov. 3, 2004),
http://www.cms.hhs.gov/media/press/release.asp?Counter=1252.

338. CMS, CMS Proposes Payment Increases, Policy Refinements for Inpatient Rehabilitation
Facilities (May 19, 2005), http://www.cms.hhs.gov/media/press/release.asp?Counter=1464.

339. Medicare Program; Conditions for Payment ofPower Mobility Devices, Including Power

Wheelchairs and Power-Operated Vehicles, 70 Fed. Reg. 50,940 (Aug. 26, 2005) (to be codified

at45C.F.R.pt.410).

340. Mat 50,946.
341. Medicaid Program; Disproportionate Share Hospital Payments, 70 Fed. Reg. 50,262

(Aug. 26, 2005) (to be codified at 42 C.F.R. pts. 447 and 455).

342. M at 50,267-50,268.



1 094 INDIANA LAW REVIEW [Vol. 39: 105

1

[(1) t]he extent to which hospitals in the [s]tate have reduced
uncompensated care costs to reflect the total amount of claimed
expenditures made under Section 1923 of the Act, . . . [(2)] DSH
payments to each hospital comply with the applicable hospital-specific

DSH payment limitf; (3) o]nly the uncompensated care costs of
providing inpatient and outpatient hospital services to Medicaid eligible

individuals and uninsured individuals as described in Section

1923(g)(1)(A) of the Act are included in the calculation of the hospital-

specific limits[; (4)] the [s]tate included all Medicaid payments,

including supplemental payments, in the calculation of such hospital-

specific limits[; and (5) t]he [s]tate has separately documented and

retained a record of all its costs under the Medicaid program, claimed

expenditures under the Medicaid program, uninsured costs in

determining payment adjustments under Section 1923 of the Act, and

any payments made on behalf of the uninsured from payment
adjustments under Section 1923 of the Act.^"^^

"Federal matching payments are contingent upon a state's annual submission of
both the annual DSH report and the independent certified audit."^"^

Vin. Labor AND Employment

A. Fair Labor Standards Act ( "FLSA '*)

The Department of Labor ("DOL") has issued numerous opinion letters in
the past year in an attempt to clarify the FLSA overtime regulations issued in
2004, a couple of which involve hospitals and health care systems.

7. Overtimefor ''Joint Employees" ofHealth Care System—FLSA Opinion
Letter 2005-15.—On April 11, 2005, the DOL issued an opinion letter in
response to a question from a health care system about its obligation to pay

overtime under the FLSA.^"^^ The health care system had a nurse who held
positions at two different companies within the system. Based on a review of the
facts provided, the DOL determined that the health care system had to pay
overtime to the nurse if the nurse's combined hours at the two employers
exceeded forty hours in a workweek.

^"^^

The DOL's determination was based on its interpretation of the joint
employer regulations, which state that "an employee who performs work that
simultaneously benefits two or more employers, or works for two or more
employers at different times during the workweek," generally will be jointly

employed "where the employers are not completely disassociated with respect

343. Mat 50,268.
344. Id.

345. U.S. Department of Labor, FLSA Opinion Letter 2005-12 (Apr. 12, 2005) [hereinafter
FLSA 2005-12].

346. Id.



2006] HEALTH LAW 1095

to the employment of the particular employee and may be deemed to share
control of the employee, directly or indirectly, by reason that one employer

controls, is controlled by, or is under common control with the other
employer."^'*^ Pursuant to these regulations, if the companies have common
control, especially in personnel matters, the DOL will treat them as the same
company for employment-related purposes.

The DOL's recent opinion highlights the fact that separating personnel
functions may not be enough to avoid being joint employers. Each entity within
the health care system that requested the opinion had its own human resources
department, employee handbook, payroll system, and retirement plan. There was
no regular interchange of employees between the entities. In addition, each

entity had its own federal identification number.^"^^ Nonetheless, the DOL still
found that they were joint employers.

The DOL looked at the fact that the two entities shared a common president
and board of directors. It also noted that one human resources department
occasionally provided administrative support to the other, the Senior Vice

President ofHuman Resources and several other senior executives and managers
had responsibility for more than one entity within the system, non-union
employees had common health care plans, and job openings were posted within
the system. Additionally, the DOL considered the fact that some ofthe personnel
policies were the same (although apparently in different handbooks), such as the
FMLA, anti-harassment, and anti-nepotism policies. Because of these "multiple
associations," the DOL found that both employers were responsible for
combining the hours an employee worked at both entities for purposes of
calculating overtime.^"^^

Thejoint employer analysis is extremely fact-sensitive—several factors need
to be considered and each relationship has to be reviewed separately. To avoid
being a joint employer, companies need to remain as separate as possible, and

stay away from "multiple associations," similar to those found by the DOL in this
recent opinion letter. If related companies wish to take advantage ofeach other's

expertise or the cost effectiveness of combined insurance plans, they should
understand the legal consequences, which may reach far beyond the calculation
of hours worked by an employee who works for both companies.

2. Exempt Status of Nurse Practitioners—FLSA Opinion Letter 2005-
20.—The DOL issued another opinion letter on August 19, 2005, that is directly
applicable to the health care industry.^^^ FLSA Opinion Letter 2005-20
addressed two issues. The first issue was whether having some Nurse
Practitioners who were treated as non-exempt because they worked on an as-
needed basis and were paid hourly for their work would invalidate the exemption
from overtime for the remainder of the Nurse Practitioners who performed the

347. 29C.F.R. §791.2(b)-(b)(3)(2005).

348. FLSA 2005-12, 5M/7ra note 345.
349. Id.

350. U.S. Dep't of Labor, FLSA Opinion Letter2005-20 (Aug. 19, 2005) [hereinafter FLSA
2005-20].



1096 INDIANA LAW REVIEW [Vol. 39: 105

1

same duties as the PRN Nurse Practitioners, but were paid on a salaried basis.^^'
The DOL took the position that having some employees who are treated as
exempt within the same job classification, and performing the same duties, as
others who are paid on an hourly basis does not affect the exempt status of the
other employees.^^^ This assumes that those who are considered exempt truly
meet the duty and salary basis requirements necessary for the exemption.^^^

The second issue addressed by the Opinion Letter was whether paying
otherwise exempt employees a shift differential for working evenings and

weekends affects their salary basis, and therefore invalidates the exemption. The
DOL's opinion is that the predetermined amount of salary necessary to support
an exemption need not include all of the compensation that the employee will be

paid.^^"^ Further, the exemption is not lost if an employee who is paid the proper
salary also receives additional compensation based on hours worked for work
beyond the normal workweek. Such additional amounts of compensation may
be paid on any basis (e.g., flat amount, bonus, straight-time hourly amount, time

and one-half of a calculated hourly amount, paid time off, etc.).^^^ Accordingly,

the DOL opinion was that an otherwise exempt employee may be paid an
"overtime premium" or a shift differential without invalidating the otherwise

exempt status.
^^^

B. Exclusive Remedy of Worker's Compensation:
Jennings v. St. Vincent Hospital and Health Care Center

The Indiana Court of Appeals issued a decision in 2005 reaffirming that
employees working for health care facilities through a staffing agency will be

considered employees of both entities and will be subject to the exclusive

remedies provisions in the Worker's Compensation Act.^^^ Jennings was a
registered nurse who specialized in emergency room care.^^^ He was employed
by StarMed, a company that assigned healthcare workers to hospital facilities on

35 1

.

Although the Opinion Letter did not specifically state, it was presumed that the exemption

for the Nurse Practitioners was the professional exemption. The DOL regulations regarding the
professional exemption can be found at 29 C.F.R. § 541.300 (2005).

352. See 29 C.F.R. § 54 1 .2 (stating that exemptions are not based on job title or classification,

but rather upon the salary and duties of the individual employee).

353. 5^^ 29 C.F.R. pt. 541.

354. The DOL relied on 29 C.F.R. § 541 .602, which states that an employee is compensated
on an salaried basis "if the employee regularly receives each pay period on a weekly, or less

frequent basis, a predetermined amount constituting all or part of the employee's compensation,

which amount is not subject to reduction because of variations in the quality or quantity of the work

performed." 29 C.F.R. § 541.602 (emphasis added).

355. 5e^ 29 C.F.R. § 541.604(a) (2005).

356. FLSA 2005-20, 5Mpra note 350.
357. IND. Code § 22-3-2-2 (2005).

358. Jennings v. St. Vincent Hosp. & Health Care Ctr., 832 N.E.2d 1044, 1048 (Ind. Ct. App.),
reh'g denied (Ind. Ct. App. 2005), trans, denied (Ind. 2006).



2006] HEALTH LAW 1097

a temporary basis. In 1992, StarMed contracted with St. Vincent to provide

St. Vincent with nurses for temporary staffing needs. Jennings was assigned by

StarMed to work at St. Vincent from December 11, 1999, to March 9, 2000.^^^

On March 7, 2000, Jennings allegedly contracted Hepatitis C after being
stuck by an angiocatheter while performing nursing duties at the emergency room
at St. Vincent Hospital.^^^ Jennings filed a claim for worker's compensation

benefits against StarMed. He also filed a civil suit against St. Vincent claiming
negligence. St. Vincent responded with a motion to dismiss based on lack of

subject matter jurisdiction, claiming that Jennings was a co-employee of St.
Vincent and StarMed, thus invoking the protection of the exclusive remedy
provision of the Worker's Compensation Act.^^^ Under this provision, an injured
employee is entitled to worker' s compensation benefits only, and may not sue the
employer for damages. The trial court granted St. Vincent's motion, and
Jennings appealed that determination.

^^^

In upholding the trial court' s decision, the court begrudgingly^^^ determined

that Jennings was a co-employee of St. Vincent and StarMed.^^ The Worker's
Compensation Act explicitly recognizes that a worker may have more than one
employer at a given moment.^^^ To determine whether a worker was engaged in
a joint employment situation, seven factors must be evaluated and weighed as a

balancing test.^^^ The factors include: "(1) the right to discharge; (2) mode of
payment; (3) supplying tools or equipment; (4) belief of the parties in the

existence of an employer-employee relationship; (5) control over the means used
in the results reached; (6) length of employment; and (7) establishment of the

work boundaries."^^^

After analyzing each factor, the court determined that St. Vincent's right to

discharge Jennings, the tools and equipment that St. Vincent supplied Jennings,

and, most importantly, its control over Jennings's performance of his duties led

to the conclusion that Jennings was a co-employee of St. Vincent and StarMed.^^^
Weighing against this determination were the belief ofthe parties in the existence

359. Id.

360. /J. at 1049.

361. iNfD. Code § 22-3-2-2.

362. Jennings, 832 N.E.2d at 1049.

363. The court urged the legislature to act to address the given situation stating that a

"deficiency in our current system of worker's compensation" exists. Id. at 1047. The court did not

note that in 2001, the Indiana General Assembly amended M). CODE § 22-3-6- 1(a), the definition

of an "employer" to state, "Both a lessor and a lessee of employees shall each be considered joint

employers of the employees provided by the lessor to the lessee for purposes of [IND. CODE §] 22-3-

2-6 and [iND. Code §] 22-3-3-31." See Jennings, 832 N.E.2d at 1050; iND. CODE §3-6-1(2).

364. 7e/im>ig5, 832 N.E.2d at 1055.

365. iND. CODE § 22-3-3-3 1 ; Jennings, 832 N.E.2d at 1050.

366. yennm^5, 832 N.E.2d at 1050-51.

367. Id.

368. /J. at 1051-54.



1098 INDIANA LAW REVIEW [Vol. 39: 105

1

of an employer-employee relationship and length of employment factors.^^^ The
court found that the mode of payment factor was not determinative.^^^ Because
the more significant factors weighed in favor of an employer-employee
relationship, the court concluded that both StarMed and St. Vincent were
employers protected by the exclusive remedy provision.

C. Immigration

1. J-1 WaiversforForeign Medical Graduates.—Routinely, foreign medical
graduates ("FMGs") enter the United States on temporary J-1 exchange visitor
visas to complete graduate medical education and/or training in this country.

Upon completion of such programs (often medical residency and fellowship
training), the FMG must return home to satisfy a two-year home residency
requirement before becoming eligible for any other visa category or lawful

permanent residence.^^^ Not surprisingly, many FMGs seek a waiver of their
home residency requirement to pursue employment opportunities in the United
States.^'^^ One waiver option is the "Conrad 30" program which allows each state
health department to grant thirty such waivers to FMGs.^^^ In exchange, the

FMG must agree to practice medicine for three years in a designated healthcare
shortage area. Once the two-year home residency requirement of the J-1 visa
status is waived, the physician is able to pursue other immigration options,

including sponsorship for H-IB visa status and eventually lawful permanent
residence.^^"^ On December 3, 2004, the President signed legislation that
extended the "Conrad 30" J-1 waiver program for foreign-bom physicians to

June 1, 2006.^^^ The Act also included a number of other important changes
related to J-1 waivers, such as permitting doctors to practice in either primary

care or specialty medicine. Historically, such waivers were targeted for

physicians practicing primary care only. Under the new law, a specialist may
qualify if there is a demonstrated shortage of doctors able to provide the medical

specialty in the designated geographical area.^^^ Additionally, five ofeach state's

thirty waivers may be granted to a doctor who practices in areas not designated
as underserved if the doctor receiving the waiver practices in facilities that serve

369. Mat 1052.
370. W. at 1051.

371. 8 U.S.C.§ 1182(e) (2000).

372. Per 8 U.S.C. § 1 184(1), any federal agency or state health department may serve as an

interested government agency and request a waiver on behalf of a FMG.

373. The "Conrad" program was originally enacted as a part of The Immigration and

Nationality Technical Corrections Act of 1994 at § 220, Pub. L. No. 103-416, 108 Stat. 4305

(codified at 8 U.S.C.§ 1184(1)).

374. 8 U.S.C § 1182(e).

375. Pub. L. No. 108-441, 118 Stat. 2630 (codified at 8 U.S.C. §§ 1 182 and 1 184) (improving

access to physicians in medically underserved areas).

376. Id.



2006] HEALTH LAW 1099

patients who reside in shortage areas.^^^ This may permit providers in counties
with less than a "whole county" Health Professional Shortage Area ("HPSA") or
Medically Underserved Area ("MUA") designation to qualify as a waiver
sponsor. Finally, physicians sponsored for a waiver by either a federal or state

agency are exempt from the H-IB cap, discussed more thoroughly below.^^^

Under the prior law, only physicians receiving a waiver under the Conrad
program were exempt from the cap.^^^

2. H-IB Annual Quota.—Although not exclusively affecting the healthcare
industry, the current annual quota of 65,000 on the number of H-IB visas^^^ has
caused considerable difficulty for many employers. Employers in the healthcare
industry regularly utilize the H-IB visa category to sponsor foreign physicians
and other health care workers.^^* The Fiscal Year 2006 H-IB cap was reached
weeks prior to the start of the fiscal year on October 1, 2005.^^^ Enacted

December 3, 2004, the H-IB Visa Reform Act of 2004 did not directly raise the
annual cap, however, additional foreign nationals are now exempt from the
65,000 annual limitation.^^^ For instance, 20,000 visas have been set aside for

foreign nationals with a Master's or higher degree from a U.S. institution of

higher education.^^"^ Foreign nationals with offers to work at institutions of
higher education or related or affiliated non-profit entities^^^ and those who
already have been counted against the cap continue to be exempt from the

numerical cap.^^^ Unfortunately, the current quota still has not been sufficient to

meet the demand for H-IB professionals, and new legislation to further increase
and extend the quota will be the subject of continuing debate.

3. Lawful Permanent Residence.—Frequently employers, including those in
the healthcare industry, choose to sponsor valued foreign national employees for

lawful permanent residence or green card status. An important change affecting

377. Id.

378. Id.

379. 8U.S.C. §1184(1)(2)(A).

380. /^.§ 1184(g)(1)(A).

381. The H-IB visa category is only available to individuals working in "specialty

occupations" which is generally interpreted to mean the position must require a minimum of

baccalaureate level education in a particular discipline and the applicant must meet that degree

requirement. Id. § 1184(i)(l). As such, most nursing positions do not qualify for H-IB

classification.

382. Press Release, U.S. Dep't ofHomeland Sec, Citizenship and Immigration Servs., USCIS

Reaches H-IB Cap (Aug. 12, 2005) (on file with author).

383. L-1 Visa and H-IB Visa Reform Act, Pub. L. No. 108-447, 1 18 Stat. 2809 (codified at

8 U.S.C. §§ 1 182, 1 184, 1356 and 42 U.S.C. § 1869 (2005)). In addition, the $1000 fee has been

made permanent and raised to $1500 along with the creation of a new $500 Fraud Prevention and

Detection Fee. Id.

384. Id.

385. Non-profit health care entities with formal affiliations with institutions of higher

education may qualify for an exemption from the cap.

386. 8 U.S.C. § 1184(g).



1 1 00 INDIANA LAW REVIEW [Vol. 39: 105

1

this process is the publication of the Department of Labor's Final Regulations on

the Labor Certification for the Permanent Employment of Aliens in the United
States and Implementation of a New "PERM" System.^^^ Effective March 28,
2005, this new system has dramatically affected the labor certification process
which is often the initial requirement for permanent residence based on an offer

of employment.^^^ Most significantly, it has altered the prevailing wage system
utilized by the Department of Labor, transitioned the labor certification

application to an electronic, on-line filing process, and provided a clear sequence

of recruitment requirements for the testing of the U.S. labor market in

determining whether any qualified U.S. workers are available for the work
offered to the foreign national.

^^^

IX. Long-Term Care

The Centers for Medicare and Medicaid Services implemented a provision
ofthe Medicare Prescription Drug, Improvement, and Modernization Act of2003

regarding hospital discharge planning for patients who require post-hospital
extended care services.^^^ The portions of the rule that most affect long-term care
facilities require that hospitals include in a patient' s discharge plan lists ofHome
Health Agencies ("HHAs") or skilled nursing facilities ("SNFs") that are
available to the patient, in the appropriate geographic area, and participate in the

387. Labor Certification for the Permanent Employment of Aliens in the United States;

Implementation of New System, 69 Fed. Reg. 77,326 (Dec. 27, 2004) (codified at 20 C.F.R. pts.

655 and 656).

388. Importantly, the Department of Labor has long recognized nursing and physical therapy

as job shortage areas. These occupations are designated as Schedule A, Group 1 at 20 C.F.R. §

656.5 and are exempt from the rigors of labor market testing. However, these labor certifications

must be filed with Citizenship and Immigration Services (not DOL) and follow the labor

certification requirements outlined in the amended PERM rule at 20 C.F.R. § 656. 15. For Schedule
A, Group I filings, the principal changes concern filing ofthe new form ETA 9089, Application for
Permanent Employment Certification, and complying with the changes in the prevailing wage

system and internal posting notice obligations. Additionally, in response to the new PERM
regulations, Citizenship and Immigration Services also revised their internal policy memoranda with

respect to Schedule A applications received before and after the effective date of the PERM
regulation. Interoffice Memorandum from William R. Yates to Regional Directors, et. al., USCIS

Revises Guidance Memorandum Describing New Schedule A Requirements, Doc. No. 05101267
(Sept. 23, 2005) (available through the American Immigration Lawyers Association, www.aila.org).

Recently, CIS announced that it is considering additional revisions to the posting notice

requirements for roving employees or employees whose work site is not yet defined. AILA-SCOPS

Q&A Regarding Schedule A Posting Requirements, Doc. No. 05 1 22 1 62 (Dec. 19, 2005) (available
through the American Immigration Lawyers Association, www.aila.org).

389. Labor Certification for the Permanent Employment of Aliens in the United States;

Implementation of New System, 69 Fed. Reg. 77,326.
390. 42 C.F.R. § 482.43 (2005).



2006] HEALTH LAW 1101

Medicare program.^^^ The patient or the patient's family must be informed of
their right to choose from among the providers listed, and the discharging
hospital must not favor particular providers or limit the patient' s choice.^^^ If the

patient is enrolled in a managed care organization, the lists must indicate what
providers or services have a contract with the organization. ^^^ Finally, the

hospital must disclose those providers in which it has a disclosable financial

interest, and providers that have such an interest in the hospital.
^^"^

The Drug Enforcement Agency ("DEA") issued a regulation designed to
address the accumulation of surplus controlled substances at long term care

facilities.
^^^ The DEA recognized that many long term care facilities ("LTCFs"),

which are not DEA registrants, receive a resident's entire dosage of a controlled
substance, dispense it daily, and must dispose of excess when residents leave the
facility or change their medication.^^^ To alleviate this problem, the DEA issued
a final rule permitting pharmacies to establish automated dispensing systems

("ADS") in LTCFs.^^^ "The pharmacy stores bulk drugs in the machine . . . and
controls the ADS remotely. . . . Only authorized staff of the LTCF would have
access to [the machine's] contents."^^^ Drugs "are not considered dispensed until

the system provides them, [so] drugs in the ADS are counted as pharmacy stock.
. . . If patients do not take all of the drugs prescribed, the excess can be dispensed

to other patients."^^^

The Department of Health and Human Services issued a regulation
addressing the notice given to residents and visitors of a nursing facility ("NF")

or skilled nursing facility regarding nursing levels."^^ This regulation requires

NFs and SNFs to post the "number of hours worked by . . . licensed and
unlicensed nursing staff who are directly responsible for resident care[,]"
reflecting the number and type of staff per shift and calculating the total number
of hours worked."^^^ Licensed staff includes registered nurses ("RNs"), licensed

practical nurses ("LPNs"), or licensed vocational nurses.'^^^ Certified nurses

391. Id. § 482.43(c)(6).

392. Id. § 482.43(c)(7).

393. Id. § 482.43(c)(6)(ii).

394. Id § 482.43(c)(8).

395. Preventing the Accumulation of Surplus Controlled Substances at Long Term Care

Facilities, 70 Fed. Reg. 25,462 (May 13, 2005) (to be codified at 21 C.F.R. pts. 1300, 1301, 1304,

1307).

396. Id.

397. W. at 25,462-25,464.

398. Mat 25,462.
399. Id.

400. Medicare and Medicaid Programs; Requirements for Long Term Care Facilities; Nursing

Services; Posting of Nurse Staffing Information, 70 Fed. Reg. 62,065 (Oct. 28, 2005) (to be

codified at 42 C.F.R. pt. 483).

401. Id. at 62,012.

402. Id.



1102 INDIANA LAW REVIEW [Vol. 39:1051

aides ("CNAs")» as defined by state law, would constitute unlicensed staff.'*^^
"Direct resident care includes, but is not limited to . . . assisting with activities

of daily living, performing gastro-intestinal feeds, giving medications,

supervising the care given by CNAs, and performing nursing assessments to
admit residents or notify physicians about a change in condition.

'"^^"^

X. Indiana Legislative Changes

A. Physician Disclosure ofFinancial Interests

House Bill 1306, effective July 1, 2005, requires a physician to provide
certain information to an individual before referring the individual to a health

care entity in which the physician has a financial interest.'^^^ Specifically, a
physician must disclose in writing to the individual that the physician has a

financial interest in the health care entity and inform the individual in writing

that the individual may choose to be referred to another health care entity, before
the physician may refer an individual to a health care entity in which the
physician has a financial interest."*^^ The physician must keep a copy of the
notice signed by the individual."^^^ However, the above does not apply if a delay
in treatment caused by compliance with the requirements would reasonably be
excepted by the referring physician to jeopardize the individual's health, impair

the individual's bodily functions, or cause dysfunction of a bodily organ or part

of an individual."^^^ Compliance with these requirements is a condition of

physician licensure under Indiana Code section 25-22.5."^^^

B. Health Entity Construction Projects

Under House Bill 1330, before the owner of a hospital or proposed hospital
may begin a construction project that is estimated by the hospital to cost at least
$10 million or an ambulatory or proposed outpatient center may begin
construction that is estimated to cost at least $3 million the owner must hold at
least two public hearings concerning the construction project and publish notice

of each hearing at least ten days before the hearing is held.'^'^

This Bill does not apply to any construction project begun prior to July 1,
2005."^'^ Additionally, notwithstanding the hearing, a statement or question

regarding a construction project or an objection to a construction project that

403. Id.

404. Id.

405. H.B. 1306, 2005 Reg. Sess., 1 14th Gen. Assemb. (Ind. 2005) (codified at IND. Code §
25-22.5-11-5).

406. Ind. Code § 25-22.5-1 1 -3(a) (2005).

407. M§ 25-22.5-1 l-3(a).
408. /^.§ 25-22.5-1 l-3(b).

409. M§ 25-22.5-11-4.
410. /^. § 16-21-2-1 1.5(d).

411. /^. § 16-21-2-1 1.5(c)(2).



2006] HEALTH LAW 1103

arises during a hearing may not cause a delay in or a denial of the issuance of a
license."^'^

C. Health Related Information Disclosure

Under Senate Bill 293, a covered entity may disclose certain "protected
health information" to a law enforcement official who requests the protected
health information for the purpose of identifying or locating a missing person/^^

The protected health information allowed to be disclosed includes contact
information and previous addresses of the individual's family, personal

representative, and friends.'*^'^

D. Health and Hospital Corporation

Several sections of House Bill 1553 made changes to various duties of the
Health and Hospital Corporation ofMarion County and the Corporation' s Board,

including removing certain residency requirements of the Board members and
allowing Board members to waive compensation."^^^ Moreover, this bill also
provided the division of public health with the powers and duties of a local

department of health.
"^'^

E. Home and Community Based Services

House Bill 1069 voided rules adopted by the Division of Disability, Aging,
and Rehabilitative Services ("DDARS") for home and community based services
C'HCBS").^^^ The bill required DDARS to adopt new rules implementing the
caretaker support program and standards for continuum of care providers by

January 1 , 2006."^^^ DDARS, in adopting the new rules, must consult with certain
interested persons to ensure that the new rules protect consumers of HCBS,
address the specific needs of distinct populations of consumers, do not create

barriers to HCBS by imposing certain costs and requirements on providers, and
comply with the requirements of the statutes establishing long term care services

and the community and home options to institutional care for the elderly and
disabled ("CHOICE") program.'^'

F. Personal Service Agencies, Prescription Drugs, and Health Professions

Sections ofHouse Bill 1098 made changes to several different statutes. First,
House Bill 1098 established a program for the licensing and regulation of

412. Id. § 16-21-2-1 1.5(h).

413. Id. § 16-39-10-4.

414. Id.

415. Id. § 16-22-8-9; id. § 16-22-8-15.

416. Id. § 16-22-8-28.

417. H.B. 1069. 1.5, 2005 Reg. Sess., 114th Gen. Assemb.(Ind. 2005) (voiding 460 lAC 1.1).

418. IND.C0DE§ 12-10.5-l-4(b).

419. Id. § 12-10.5-1-9; id. § 12-10.5-2-3.



1104 INDIANA LAW REVIEW [Vol. 39:1051

personal service agencies."^^^ The Bill required "a personal services agency[] to
obtain a license from the state health commissioner" in order to operate a

personal services agency."^^^ Operating a personal services agency without a

license is a Class A misdemeanor/^^ The Bill also established an act governing
home care services and required a placement agency to provide the home care
services consumer with certain information when a home care services worker
is placed in the consumer's home, including the worker's criminal history

report.^^^ The State Department of Labor may impose a civil penalty against a
placement agency for failing to provide a consumer with the required consumer

notice or worker notice at the times required by the statute/^"^

Additionally, House Bill 1098 amended the statute governing the regulation
of pharmacists and pharmacies to require the Board of Pharmacy to establish

procedures to ensure that pharmacies may return expired prescription drugs to
wholesalers and manufacturers and specified the information that the Board must

consider in establishing such procedures."^^^ Moreover, the Bill expanded the

requirements that must be met by a wholesale drug distributor for eligibility for

licensure and specified prohibited acts, including certain criminal acts related to

wholesale drug distribution and legend drugs."^^^

Finally, House Bill 1098 substantially revised the statute governing speech

pathologists and audiologists by, among other things, requiring licensure of
speech-language pathology aides, associates, and assistants and amending the

licensure requirements of speech-language pathologists and audiologists."^^^

420. Id. §§ 16-27-4-1 to -23.

421. Id. § 16-27-4-6(a).

422. Id. § 16-27-4-23.

423. M§§ 22-1-5-1 to -19.
424. Id. § 22-1-5-19.

425. Id. § 25-26- 13-4(b)(3).

426. Id. § 25-26-14.

427. Id. §25-35.6-1-1 to -10.